Turning a hobby into a business or setting up a side hustle can be a great way of making extra money. With the cost-of-living crisis, any way to boost earnings can make a huge difference, especially for those who are struggling. However, what happens when you do start making money from your side hustle and how does this affect employment? Does this mean you need to start paying taxes on these earnings? It may seem complicated at first, but the process is relatively straightforward.
Tax-Free Trading Allowance
Often, people are confused about when their side-hustle becomes taxable in the eyes of HMRC. This is understandable as there’s clearly a difference between a fully-fledged business and selling on eBay, for example. However, HMRC make the distinction relatively simple. Everyone has a tax-free trading allowance, outside of their regular employment, which is set at £1000 per year. Therefore, anyone making more than this amount from their side-hustle is required to register with HMRC and pay any potential taxes.
Registration
Those who have made more than the tax-free trading allowance from their side-business must register with HMRC but what does that entail? There are different options available, according to the business in question. Most people will need to register as self-employed and complete self-assessment as a sole trader. However, you may also wish to create a limited company, which is a more involved process. Setting up a limited company requires greater time and effort and can include ongoing legal obligations. However, the main upside to this option is that it separates and protects your own personal assets, away from the business and its obligations.
In terms of taxes, these also change according to the way in which your self-employment is categorised. Sole traders will pay income tax, whereas limited companies pay corporation tax. You may also be affected by National Insurance and VAT, depending on how your business works and how much money it makes. When in doubt, contact HMRC to ensure you’re following the correct rules.
Deductions
Just as with any form of self-employment, your side hustle can benefit from tax deductions. Self-assessment will include opportunities in which to declare any potential expenses, which could be deducted from the tax owed. This can be particularly helpful for side or hobby businesses, which can often incurr a variety of expenses. This is something to keep in mind, especially for those worried about an expensive tax bill.
Documentation
One of the main things to keep in mind when running any sort of small venture, is to keep track of documentation. Think invoices, receipts for expenses, any sort of bills that you may incur in the running of the business. Even if you expect that you won’t meet the tax-free trading allowance, still try to keep track of everything. Should you eventually need to complete self-assessment or should HMRC require more information from you, you will be safe in the knowledge that you have all the relevant evidence.
What about my job?
Of course, the whole point of a “side hustle” is that it’s on the side of your regular employment. In the most part, any side business that you choose to take on, should not affect your main job, however it’s important to check your contract. It may be that you must notify your employer of any changes to your circumstances. There can also be strict non-competition rules in your contract, in which you agree not to compete with your employer. However, this will only apply in very specific circumstances, most likely with freelancers. Again, double check your contract and when in doubt, talk to your boss.
Creating a side business can offer a wealth of benefits but the process may cause confusion, especially when HMRC is involved. Fortunately, there is help available for those who need it. The team at Salhan Accountants have a wealth of experience in providing expert services and advice, on all different financial matters.
