Most of us want to make a little extra cash from time to time and at MSA we’re all for people bringing in as much extra income as possible (whether that's selling items at a car boot, or taking a second job), but with additional income comes additional tax liability. HMRC’s slogan ‘Tax doesn’t have to be taxing’ isn’t fooling anyone. The truth is that these extra tax implications can be minefield field to work out yourself.
We have created this guide to help you identify when you might have to pay tax on your money making schemes, how much you might have to pay and when you might have to pay it. Unfortunately, it can’t cover every eventuality, and if you’re ever in doubt, it’s recommended that you get in touch with your local tax office.
When do you start paying tax?
In a nutshell
- Everyone in the UK can earn a certain amount per year tax free (£12,500 for 2020/21)
- You need to let HMRC know if you exceed this amount (assuming you aren't on PAYE)
- If you become self-employed or set up a business you need to let HMRC know within 3 months (there’s a £100 fine if you don’t)
- Class 4 National Insurance Contributions (NICs) start at 9% on all income over £9,500
- Capital gains tax of 18% – 28% is payable on items worth more than £6,000, and over and above your £12,300 capital gains allowance
- You can rent a room in your home tax free up to £7,500 per year
- Additional income earned up to £3,000 can be taxed through PAYE
- 2nd jobs will be automatically taxed at 20% (BR tax code)
- There's a new £1,000 trading allowance and £1,000 property allowance introduced in Autumn 2017 and applied retrospectively from 2017/18
Personal tax allowance
In the UK everyone is entitled to earn a certainly level of tax free income. The amount varies depending on when you were born, and usually increase slightly every year.
For those born after April 1948, the 2019/20personal allowance is £12,500.
There are a few rules and caveats around this, but for the vast majority of people the statement above holds true. You can find out more about Personal Tax Allowances on the HMRC website.
The Government's new Trading Allowance came into effect for the 2016/17 tax year. It means that sole traders with an income of up to than £1000 no longer need to register with HMRC, and can pocket their earnings. Easing the administrative burden for those with a small side hustle.
If your income is over £1000 per year, then unfortunately you still have to register with HMRC but can opt to whether to use your trading allowance, or your business expenses and capital allowances to work out your profit.
For example Nina has side hustle making jewellery and earns £800 a year from this in addition to her full time job. She doesn't have to register with HMRC or pay tax on her business income because she earns less than £1000 from it.
Jacob on the other hand earns £1,500 from teaching Spanish in his spare time, and has costs of £400. He must register with HMRC as a sole trader and fill out a tax return. He opts to use his trading allowance and so only pays tax on £500 of his income. If he'd chosen to deduct his expenses then he would have paid tax on £1100 of the £1500 he received.
So do I have to pay tax on my income?
If your only income is from activities such as buying and selling on eBay, blogging, babysitting, gardening, or self employed cash in hand jobs, and if you don’t earn more than £12,500 per year than you don’t need to pay income tax, but you will be above the threshold for Class 4 National Insurance Contributions, which are charged at 9% on income over £9,500.
More likely, you already have a full time (or part-time) job paying a salary over £12,500 per year. If this is the case then you will almost certainly be required to pay tax on your additional income, as your personal tax free allowance is already being consumed by your ‘day job and you’re paying tax on your salary under the Pay as you earn (PAYE) scheme.
This is usually charged at 20% on earnings up to the higher tax rate cut-off. If you have a second job, you'll often see the tax code ‘BR' on your payslip.
If you’re currently drawing a pension, it’s important to note that for tax purposes this counts as income, and should be taken into account when calculating whether or not your earnings are less than your allowance.
Auction sites and selling online
Many of us are familiar with auction sites such as eBay and often use them to get rid of old junk or free up cash in old possessions. The tax rule here is actually quite simple. Cash in the attic (so to speak) is not taxable. So if all you’re doing is selling your old items, you do not need to pay tax on the income. eBay and Paypal take enough of that from you as it is.
If you are buying goods to sell on eBay for a profit, than that income is taxable and should be declared to HMRC. Of course some eBay users do both, and that’s where things get more complicated. In such an instance it’s important to distinguish between the two activities, HMRC will be able to, so make sure you keep accurate records of your activity.
If you’re earning a good amount and exceed your personal tax free allowance, you don’t necessarily have to register as a business, but you do need to declare your new income stream within 6 months of the end of the tax year. This is so HMRC can send you a tax return to fill out to ensure you pay the correct amount.
Personal skills and hobbies
If you earn an income from selling your time such as from freelance work, gardening and the like, then this income is taxable (if it’s over your personal allowance). If this is just on an ad hoc basis for small amounts, then you needn’t worry too much, but if you start to make a good profit you’re effectively running a business and need to let the taxman know within three months.
Capital gains tax
You need to consider capital gains tax (CGT) when selling any item(s) you own that have increased in value since you purchased them. For example antique jewellery, or works of art.
The important thing to note is that your regular personal allowance doesn’t apply to capital gains tax. Instead there is a separate personal allowance for CGT worth £12,300 per year, and CGT itself doesn’t apply to items worth less than £6,000.
So far so good. Here’s how it works in practice:
You have some antique jewellery that you previously bought for yourself for £50 and it rises in value to £5,000. When you come to sell it, there is no tax to pay despite the fact that you’re up £4,950.
Now let’s say you bought some shares for £2,500 a few years ago. You then sell them for £10,000. You’ve made a gain of £7,500 (£10,00 less £2,500), but because that gain is less than your CGT allowance, there’s no tax to pay (provided you haven’t made any other gains that would take you over your allowance)
Should you exceed your personal CGT allowance in any given year, you only pay CGT on the excess. The amount you have to pay varies depending on your circumstances, but is usually 10% (18% on property) for basic rate tax payers, and 20% (28% on property) for any amount above this
Note that CGT does not apply to equally to all items some items such as personal cars, are exempt. Others such as your main home are liable for GCT but usually qualify for relief.
For more information on CGT see the HMRC website.
Rent and lodging
Renting out your second home, your driveway, or even room in your main home are all great ways of boosting your income, but you should be aware that rent is always taxable regardless of your personal allowance.
Sucks, right? The good news here is that again there is sort of personal allowance. It’s actually a relief exemption and allows you to earn up to £7,500 (up from £4,250) from renting a room in the home in which you live. Note that this does not apply to renting out the whole house, driveway, or anything else.
Cashback and miscellaneous money making
Cashback sites such as Topcashback and Quidco can be great little money earners if you’re a big online shopper. Effectively you’re being given commission to shop at certain stores or buy certain items.
The taxman rarely misses a trick, and many accountants will point out that cashback could be classed as taxable income especially if it’s seen as a way to increase your income (see this article about a couple earning £2,500 per year via cashback websites). This all stems from a decision taken by HMRC back in May 2013. Then HMRC stated that it intended to start taxing loyalty bonuses paid on investment funds.
Hargreaves Lansdown, the UK’s largest fund supermarket, claimed that the decision would not just affect funds but other incentives such as cashback credit cards and websites. However, HRMC has dismissed this as nonsense stating:
“There is no question of tax becoming payable on cashbacks received from credit, debit and loyalty cards or any other kind of cashback payment.”
Rather than being seen as income, cashback is merely considered a discount on the goods/services purchased, albeit a belated one. As such it isn’t subject to tax. Hurray!
What if I’ve paid too much tax, or have been taxed when I shouldn’t have been?
More often than not the taxman is right, but there are occasions, especially with students or those working two jobs, where you end up being taxed more than you should. If you think you’ve been unfairly taxed you have a couple of options.
One is to fill out a R40 form and send that off along with any evidence, such as bank statements and pay slips, to Leicester & Northants (Claims), Saxon House, 1 Causeway Lane, LEICESTER, LE1 4AA. Alternatively you can write a letter, to the same address explaining what has happened.
If you’re earning a salary and being taxed through PAYE, It’s probably easier to call HRMC and explain the situation. If it’s a simple mistake they’ll make arrangements to reduce the amount of tax that automatically comes out of your pay packet, until you’re back on a level footing.
Simplifying things through PAYE
As we’ve mentioned, if you’re employed the likelihood is that you’re already paying tax via PAYE. If this is the case, then you can make things easier on yourself by contacting HMRC and changing your tax code to take into account your extra earnings.
This will mean these extra earnings will be taxed along with your salary each month, relieving you of the need to complete a tax return each year.
While this is straightforward enough, it does mean that you need to have a good idea (and likely evidence) of how much extra you’re earning a month. Because of this it’s really only suitable for those earning a steady additional income, such as rent payments, or other fixed earnings. If your earnings fluctuate too much from month to month you could end up payment too much tax, or worse, paying too little.
Typically there’s a caveat, which is that the tax on these extra earnings can’t amount to more than £3,000 per year, and the tax due must not be more than 50% of your PAYE income. Unfortunately that means this method isn’t particularly useful for those earning significant amounts. See here for more details
Separating your business banking from your personal banking
If you're earning small amounts from a regular side hustle opening a fully fledged business account might seem akin to using a sledge hammer to crack a wallnut. The added cost and hassle can be off-putting, but there are new digital accounts designed for this very purpose. Tide for example is aimed at small businesses, side hustles, and everything in between. Sign up is fast and free and you get a business account and debit card with your business name on. Unlike traditional banks it only costs 20p per transaction so isn't going to eat into your profits.
Mettle by Natwest is similar expect it is completely free. No charges at all. Like Tide it is aimed as sole traders and people trying out new business ideas. It has the added benefit though of being about invoice directly from the app, and comes with a free subscription to account app FreeAgent.