The side hustle economy has boomed during the pandemic, with an estimated value of £346billion currently. With all that wealth, side hustlers have been cautioned not to let their tax responsibilities overrun their success, as tax experts share their 10 top tips.
Many Britons transitioning from full-time employment, or simply taking their income streams more seriously, are unsure of where their hustle stands in regards to tax.
Roughly 17 percent of side hustlers were found to not be declaring their earnings or choosing to conceal their income from HMRC.
Regardless of whether this is intentional or mere ignorance, the consequences can be lethal for small businesses and burgeoning hustles.
Know when to pay
Outside of regular employment, everyone has a £1,000 additional income allowance, so if someone’s hustle has made less than this they don’t have to be concerned with HMRC.
However, hustles making over this allowance in one tax year will need to declare it and submit a Self Assessment tax return.
TaxScouts recommended opening a business account to “avoid getting caught out at tax time”.
They noted: “Having separate personal and business bank accounts can help you manage your finances more efficiently and make keeping accurate business records easier in general – saving you more time and effort when it comes to bookkeeping in the long run!”
Get tax refunds early
Tax tends to be a topic that people try to put off until the very last minute, but TaxScouts recommended against this and highlighted: “You don’t actually have to pay your tax bill when you file your tax return.
“You can actually file and pay anytime from April 6, the start of the new tax year, with January 31 of the following year as your deadline to pay your tax bills – any later and you’ll start incurring penalties.”
Filing a tax return will generate the amount of tax one owes or the refund they are due, meaning the earlier this is submitted the earlier side hustlers can receive their refunds, check how much they owe or address any discrepancies.
TaxScouts recommended putting key tax dates and deadlines in the diary to avoid missing them by accident and consequently racking up late fees.
They highlighted the following dates to begin with:
- April 6 – April 5 = the tax year
- October 5 = register for Self Assessment deadline
- January 31 = deadline to pay your tax bill online
- July 31 = Payment on Account deadline.
Record-keeping from day one
Bookkeeping and general accounting admin is no one’s favourite cup of tea, but TaxScouts pointed out that doing this from day one can help hustlers avoid “having a mad panic in January”
Many taxes in the UK provide allowances but most of them require Britons to use or do certain tasks in order to benefit from them.
Doing some simple research on what allowances could apply to oneself, and taking advantage of them “can significantly reduce your tax bill or increase your tax refund”.
TaxScouts also highlighted that some allowances are manual meaning hustlers will need to claim them through HMRC.
Side hustlers should note that while they can claim some money back on their tax returns, they cannot claim both expenses and allowances at the same time.
This is why keeping receipts is so important as if entrepreneurs can prove an expense is for their business, they can be tax deductible.
Tax efficiency, not tax evasion
National Insurance rates increased this month with the threshold due to rise in June, meaning Britons may find their tax bills don’t look the same as usual.
With this in mind, it has never been more important to be tax-efficient, through methods such as claiming tax relief on money put into pensions or investing in a startup.
Tax-free pension contributions
Saving into a private pension earns Britons a tax relief, either through their tax return or straight from their salary.
These contributions reduces one’s overall liability to things like National Insurance and income tax, but TaxScouts noted there is an annual pension allowance limit of £40,000 per year or 100 percent of one’s income.
Contributions that exceed this amount will lose the tax relief.
TaxScouts shared: “If you trade crypto as a part of your side hustle and make money, don’t forget that it’s taxable like any other asset.”
The regulations around crypto are still slowly being pieced together so it’s easy to get confused, but holding crypto makes one liable for capital gains tax if they are sold for a profit.