FreeAgent: When does a side hustle become a business that you have to pay tax for? image

FreeAgent: When does a side hustle become a business that you have to pay tax for?

FreeAgent are here to clear up the rules on side hustles and tell you exactly when you have to worry about paying more tax.

Posted onThursday, 11 January 2024

Who doesn’t like making a little money on the side? Whether you’re selling off some old clothes, bringing new life to old furniture or crafting handmade items as a hobby, it’s a nice boost to have that trickle of cash coming in. And you might not consider your side hustle to be a serious business.

But with the recent news about websites like Vinted, eBay and Etsy having to give more data about their sellers to HMRC, you might be questioning whether you’re swimming into the big pond of business, tax returns and self-employment. We’re here to clear up the rules on side hustles and tell you exactly when you have to worry about paying more tax.  

When do I have to start paying tax on my side hustle?

Most people won’t suddenly have to pay tax on their second-hand and homemade sales - thanks to the ‘trading allowance’. As long as you’re selling under £1,000 worth of goods or services a year, you won’t have to pay tax on those. 

Note: The trading allowance is for income, not profit - if you get paid more than £1,000, you’ll have to declare it, even if your actual profit is lower.

It’s a good idea to keep records on your side hustle, even if you don’t expect to earn over £1,000 - you don’t want to be surprised by a big sale late in the tax year and suddenly have to scramble for your records. 

If you earn over £1,000 a year from your side hustle, you’ll need to check whether what you’re selling counts as trading. HMRC has a framework for this, which is called ‘badges of trade’.

A good rule of thumb is if you’re occasionally selling old or unwanted items, you’re unlikely to be trading. However, if you buy, alter or produce goods specifically to sell, HMRC is more likely to consider you to be trading. HMRC gives some handy examples in this information sheet which can give you a steer. If you’re unsure whether your sales count as trading, you should check with an accountant

What about one-off sales of items over £6,000? 

If you have sold one or two goods this year for over £6,000, for example a piece of jewellery or an antique, you may need to report this to HMRC and pay Capital Gains Tax. Certain items are exempt, so you shouldn’t need to report selling your personal car or your house.

If you need to report sales over £6,000, you can either file a Self Assessment tax return or use the ‘real-time’ Capital Gains Tax service

Note: If you pay Capital Gains Tax when you sell an item, you won’t also have to pay Income Tax on it.  

Have the rules changed for people selling on platforms like eBay, Vinted, Depop and Etsy?

Despite what you might have seen on social media, there’s been no change to the rules for sellers - if your income is below the £1,000 trading allowance, you shouldn’t need to worry about extra tax. If you earn over the allowance, you’ll need to look into submitting a Self Assessment tax return and paying tax on your profits.  

The only change is for ‘online marketplaces’, which HMRC defines as “any digital platform that handles and enables the sale of goods and services from individuals and/or businesses to customers”. From 1st January 2024, platforms have to collect seller income, to be ready to share with HMRC by 31st January 2025. This includes platforms like eBay and Vinted, as well as food delivery, taxi services and short-term accommodation. 

This will help HMRC estimate more accurate tax bills for sole traders and businesses using these platforms, and also highlight sellers who may need to pay tax on their side businesses. 

How to keep on top of your side hustle’s finances

If you have a growing side hustle, you might want to consider getting a business bank account to keep better track of your income. 

A business account can give you extra tools to support your success, including getting FreeAgent’s accounting software for free with NatWest, Royal Bank of Scotland, Ulster Bank and Mettle business bank accounts (optional add-ons may be chargeable). 

As well as helping you track income and costs, FreeAgent calculates how much tax you owe and automatically fills out parts of your Self Assessment return. Try a 30-day free trial and find out how easy filing your tax return can be.

Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.

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