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’ve created this guide to help you identify when you might have to pay tax on your money making schemes and side hustles, 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, or a qualified tax professional.
When do you start paying tax?
In a nutshell
- Everyone in the UK can earn a certain amount per year tax free (£12,570 for 2021/22)
- 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 £12,570 (raised by £3,000 in 2022)
- From April 2022, NICs will increase by 1.25 percentage points as part of the new Health and Social Care Tax (This has now been scrapped)
- 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 (reducing to £6,000 from next year)
- 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 2021/22 personal allowance is £12,570.
There are a few rules and caveats around this, but for the vast majority of people the statement above holds true. For the highest earners in the country, the personal allowance is removed. 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 £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 £1,000 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.
Trading allowance 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 £1,000 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 instead to deduct his expenses, rather than use the trading allowance he would have to pay tax on £1100 of the £1,500 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 £12,570 per year than you don’t need to pay income tax. Crucially, now that the threshold for Class 4 National Insurance Contributions has changed to mirror that income tax, you won’t pay any National Insurance either. About £12,570 NIC are charged at 9%.
More likely, you already have a full time (or part-time) job paying a salary over £12,570 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 or similar per hour activities, 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 (falling to £6,000 in 2023/24), 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 (including AirBnB)
Renting out your second home, your driveway, or even a 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.
If you are renting a whole property or a second home, see our complete guide to tax for Airbnb hosts.
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 are based in the UK then tax refunds will be made via BACS. If you recently left the UK or a based abroad, HMRC will only issue a cheque. This can be problematic for some as trying to cash a pound sterling cheque abroad isn’t always easy. In such an event you can nominate a UK ‘friend/representative’ to the receive the cheque for you.
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 perceived cost and hassle can be off-putting, but there are new digital accounts designed for this very purpose. CashPlus Go for example is aimed at small businesses, side hustles, and everything in between. The sign up is fast and free, you get a business account and debit card with your business name on, and there’s no monthly charges or subscription fees.
Alternatively you could try Tide, a UK digital challenger specifically aimed at sole traders, micro entrepreneurs and those testing new business ideas. Again sign up is fast and free and there are no monthly cover fees. Just a 20p fee per transaction e.g. a transfer or bill payment. It’s probably the cheapest and easiest business account to get up and running.
Those that want a more structured approach, whilst still opening an account quickly and without any credit checks or references might also be interested in Card One Money (formerly CardOneBanking). The Card One Money can be opened online or in app, with your account up and running the same day. It also features cashflow monitoring and a quick-step bill payment service. It’s also the only digital challenger here to accept cheques. Get a Card One Money account
Using your personal current account for business
You may be tempted to use your personal current account to receive your business/side-hustle income. This is generally a bad idea as it typically goes against the bank’s terms and conditions. We previously wrote about using a personal account for business, since then not much has changed.
Tide (mentioned above) is one of our favourite accounts for those looking for something more akin to personal account to run their business, but those with a digital account such as Starling Bank, might want to consider opening a free account there.
Managing your finances
A business bank account will help to keep your personal and business transaction separate. Some of the those listed above will go one step further offering invoicing directly from the app, and categorisation of expenses. If you really want to take charge of your finances though online software such FreeAgent can be a real help. You can even file your self-assessment tax return or company return directly from the app. Most good business accounts can be linked allowing FreeAgent to directly pull transactions from the account. Additionally, organising your finances within an account app such as FreeAgent or Xero, eases the burden on you and your accountant (who with your permission can access your FreeAgent Account), come the end of the tax year.