Maximising returns: The ultimate guide to managing tax on your side hustles

What is a side hustle?

A side hustle is any extra money you make alongside your primary source of employment. A side hustle is usually flexible and something you love doing, allowing you to explore your skills, interests, or entrepreneurial aspirations away from your regular job.

A side hustle can be anything where you make money on the side – often this takes the form of freelancing, consulting, selling products online or offering services.

You can find out more about why to start a side hustle in this blog post, or sign up for your own side hustle with redwigwam here.

Do I have to pay tax on a side hustle?

Legally, yes – you have to pay taxes on side hustles in the UK.

You can earn up to a certain amount of money without paying tax (your personal allowance) but this is combined from ALL sources of income. Any secondary income, or side hustles should be declared to HMRC.

If you’re working with redwigwam, your tax (and National Insurance) contributions are dealt with automatically based on your tax code – there’s some more information about this below.

What if I’m just selling second hand clothes – do I pay tax on that?

On 1^st January 2024, HMRC rolled out new rulings which means digital platforms (like Vinted, eBay, AirBnb and Amazon) started collecting data about sellers, including how many sales they’ve made and the amount of income they have generated to share with HMRC.

This will allow the tax office to look at people who are selling on a large scale and ensure they are paying tax as appropriate.

This caused a large amount of furore in the news, with people feeling they would be unfairly penalised for selling on second hand clothes (which after all is good for the environment!)

The reality is though, it is only large-scale operations HMRC are interested in – these companies will only have to report on people who are making sales of over £1,700 or selling more than 30 items a year.

You can read a really detailed explanation of this from MSE Martin Lewis here. 

Martin explains, it’s not a new tax – this has always been the case – but it’s aimed at allowing HMRC to more easily find out what people are making on digital platforms and find sellers who should be paying tax.

His advice is: If the total amount you earn via a platform in a tax year is above £1000 you likely need to tell HMRC and may have to pay tax on this.

Using a PAYE model like redwigwam

redwigwam may be the perfect solution as the platform offers all the flexibility of freelance work but with the benefits of being employed.

This is because redwigwam employs you, and therefore manages all aspects of tax and NI contributions though PAYE.

This means you are assigned a tax code, and the appropriate deductions are made every time you get paid. You don’t need to complete a tax return (unless you have other earnings which do require self-assessment), so it’s much simpler if you just want to earn some extra money.

How to pay taxes on a side hustle

If you do need to fill in a Self Assessment tax return you must do so after the end of the tax year (5^th April) it applied to. If you don’t meet the deadlines for filing and paying any owed tax, you may have to pay interest and a penalty.

You’ll need records (such as bank statements and receipts) so you can complete your text return accurately.

When you’ve submitted your tax return, HMRC will let you know how much tax you need to pay. This usually works out at around a third of your profits – so budget for this amount. It’s good advice to keep this in a separate savings account so the money is there if you need it.

All the information you need, the links you need to get started are available here.

How much tax do I need to pay on my side hustle?

This depends on your circumstances, but most people have an allowance (currently £12,570) which is the amount you can earn before you pay any tax. Then the tax rate depends on how much above this allowance you earn.

If you are on a PAYE scheme, like working for redwigwam, this is all worked out automatically based on your tax code.

If not, the rule of thumb is to save one third of your profits to pay tax.

So, there you have it! If you have a side hustle in the UK, you need to check if you need to pay tax on the money you earn. Remember, it’s always better to check first, and save the money for a potential tax bill. Failing to pay tax can be costly!

Or you can run your side hustle through a platform like redwigwam where all tax payments are dealt with automatically, so you’ll know the money you earn is yours to spend as you wish!