Side activities can be a great way to earn extra cash for the luxuries of living or to invest in savings or an emergency fund. But is the additional income from a side activity yours, or do you have to share it with the tax authorities?
If you are asking yourself this question, this article is for you. We tell you if and how the income from your side activity can be taxed.
What exactly is a secondary activity?
A sideline, in simple terms, is any job that earns you money in addition to your main job. Other common names for a side job are side job, side gig, or second job.
Although the concept of the side hustle has been around for some time, side hustles have become more and more popular in recent times. A 2018 study found that one in four UK adults (25%) had a secondary activity, while 40% of those who were not were interested in starting one.
The Covid-19 pandemic has increased the need for multiple revenue streams and increased the attractiveness of sideways unrest. A side job can make all the difference in the midst of a crisis such as falling pay, being on leave, or losing your main job.
Some of the more popular side activities today include:
- Driving for a carpooling service (e.g. Uber)
- Sell items (e.g. arts and crafts on sites like eBay)
- Childcare and pet care
- Independent writing and editing
- Online tutoring
Do I have to pay taxes on my side activity?
UK income tax rules can be complicated, but the bottom line is that you have to pay tax on any money you earn that exceeds the standard tax-free abatement of £ 12,570. This allowance covers the income from your main job and all the sides you have.
The good news is that the money you earn from your side business could qualify for a tax break called the exchange allowance.
The Trading Allowance allows you to earn £ 1,000 in trading income (gross, before expenses) each fiscal year without having to pay tax. As long as it’s less than £ 1000, you don’t even need to notify HMRC that you’re earning that money.
This business allowance involves absolutely anything that generates additional income, blogging, pet sitting, selling crafts on eBay, etc.
There is also a £ 1000 home income allowance for those who rent out parts of houses.
If you plan to use the exchange allowance, you are still required to keep a record of your income. Some of the records you may need to keep include:
- Copies of your invoices (paper or electronic)
- A spreadsheet of your income receipts
- Emails confirming income received
- Bank statements
- Bank deposit payment records
- A diary or an appointment book showing your income from each client
HMRC may charge you a penalty if your records are not accurate, complete or legible and you do not keep them for the required period.
It should be noted that this tax allowance does not apply to the business income of a partnership.
More information on the exchange allowance and eligibility criteria can be found on the gov.uk website.
What happens if I earn more than the tax-exempt allowance?
If the gross income from your side business exceeds £ 1,000, you must notify HMRC via a self-assessment tax return.
The good news is that you have even more options from here to save on taxes. You can either:
- deduct the £ 1,000 allowance from your gross income and then pay tax on the remaining amount or;
- deduct qualifying expenses from your gross income, as businesses typically do, and pay taxes on the remaining income or profits.
Which option you select is entirely up to you, but you can only use one at a time. It might be a good idea to sit down first and do the math to determine which of the two will be more tax efficient.
Was this article helpful?
Some offers on MyWalletHero come from our partners – this is how we make money and make this site work. But does this have an impact on our grades? Nope. Our commitment is for you. If a product isn’t good, our rating will reflect that, or we won’t list it at all. Additionally, while we aim to showcase the best products available, we do not review every product on the market. Find out more here. The above statements are owned by The Motley Fool only and have not been provided or endorsed by any bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of the board of directors of The Motley Fool. The Motley Fool UK recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard and Tesco.