Do You Have to Pay Tax on a Side Hustle?
Side hustles have become increasingly common.
You might sell products online, freelance in the evenings, create content, offer tutoring, do photography, drive for delivery apps or provide a service alongside your main job.
The extra income can be useful.
But it also creates a tax question:
When does a side hustle become taxable?
The answer depends on how much income you receive, what type of activity you carry out and whether the activity amounts to trading.
In many cases, the key starting point is the £1,000 trading allowance.
What is the £1,000 trading allowance?
The trading allowance can allow individuals to receive up to £1,000 of gross trading income in a tax year without needing to pay tax on that amount.
The important word is gross.
That means income before expenses.
For example:
- Side-hustle income: £800
- Expenses: £200
Your gross trading income is £800.
If no other rules complicate the position, that may fall within the trading allowance.
What if you earn more than £1,000?
Once your gross trading income exceeds £1,000, you may need to consider:
- Registering for Self Assessment
- Reporting the income
- Paying Income Tax
- Paying National Insurance where applicable
- Keeping business records
That does not mean tax is automatically charged on the full amount you receive.
You may be able to deduct allowable business expenses instead of using the £1,000 trading allowance.
You normally choose between the allowance and actual expenses
If your side hustle earns more than £1,000, you generally need to consider which method is more beneficial.
Option 1: Trading allowance
You may deduct the £1,000 trading allowance from qualifying income.
For example:
- Income: £5,000
- Trading allowance: £1,000
- Potential taxable trading income: £4,000
Option 2: Actual business expenses
Instead of using the allowance, you may claim qualifying expenses.
For example:
- Income: £5,000
- Allowable expenses: £2,200
- Potential taxable profit: £2,800
In this example, claiming actual expenses could produce the lower taxable profit.
You would not normally claim both the full £1,000 allowance and all of the same business expenses.
What expenses can you potentially claim?
The answer depends on what your side hustle involves.
Potential business expenses might include:
- Materials
- Stock
- Packaging
- Postage
- Software
- Advertising
- Website costs
- Professional fees
- Business telephone costs
- Travel for business purposes
- Equipment
- Marketplace fees
The expense should generally relate to the business activity rather than being an ordinary personal cost.
Good bookkeeping can make this much easier if the activity begins growing.
Does selling things on eBay or Vinted count?
Not automatically.
Selling your own unwanted possessions is different from buying or making items specifically to sell for profit.
For example:
Selling personal possessions
You sell old clothes, furniture or electronics that you no longer need.
That does not necessarily mean you are running a trading business.
Trading
You regularly:
- Buy items to resell
- Manufacture products for sale
- Source stock specifically to make a profit
- Operate an online shop
That looks much more like a trade.
The pattern and intention behind the activity matter.
What about Etsy, Depop and online marketplaces?
If you are regularly creating or sourcing products specifically to sell through online marketplaces, the income may be trading income.
Examples include:
- Handmade jewellery
- Clothing
- Prints
- Crafts
- Digital products
- Resold goods
Do not assume that income received through an app is outside the tax system.
The platform used does not determine whether tax applies.
Do online platforms report information to HMRC?
Digital platforms can have reporting obligations that provide tax authorities with information about certain sellers.
That does not create a new tax simply because a platform reports your information.
The underlying tax rules already apply.
However, increased reporting makes it even more important that individuals understand whether their online activity needs to be declared.
What if you already have a full-time job?
Your employment and side-hustle income are generally considered together when calculating your overall Income Tax position.
For example, you might earn:
- Employment salary: £35,000
- Side-hustle taxable profit: £8,000
Your side hustle does not receive an entirely separate set of Income Tax bands.
The additional profit is considered alongside your other taxable income.
This can mean a side hustle pushes part of your income into a higher tax band.
Do you pay tax on turnover or profit?
Where normal trading-profit rules apply, Income Tax is generally based on taxable profit, not simply the amount customers pay you.
For example:
- Sales: £20,000
- Allowable expenses: £8,000
- Profit: £12,000
The £20,000 turnover and £12,000 profit are different figures.
However, remember that the £1,000 trading-allowance threshold itself looks at gross income when considering whether the allowance may apply.
Do you need a separate bank account?
A sole trader does not necessarily need a separate business bank account purely because they have a side hustle.
However, separating the money can make record keeping much easier.
A separate account can help you identify:
- Customer payments
- Business expenses
- Tax reserves
- Profit
- Cash available
Once the activity begins growing, mixing everything through one personal current account can become difficult to manage.
Keep records from the beginning
Do not wait until you think the side hustle is “big enough” before keeping records.
Track:
- Income
- Expenses
- Platform fees
- Refunds
- Mileage
- Equipment purchases
- Advertising
- Customer payments
A simple spreadsheet may be enough initially.
If the activity grows, accounting software may become more useful.
What if you are paid in cash?
Cash income is still income.
The fact that a customer pays:
- Cash
- Bank transfer
- PayPal
- Stripe
- Marketplace balance
- Cryptocurrency
does not by itself determine whether the payment is taxable.
All relevant business income should be included when calculating the trading position.
What if customers pay through PayPal?
The same principle applies.
Money received through payment platforms does not become tax-free simply because it never initially reaches your bank account.
Keep transaction reports showing:
- Gross payment
- Platform fee
- Refunds
- Net amount received
This makes it easier to reconcile income correctly.
What about cash tips?
Tips can also create tax consequences depending on how they are received and distributed.
For example, tips paid directly to an individual may be treated differently from tips distributed through an employer-operated arrangement.
If your side hustle regularly generates tips, include them when reviewing your tax position.
When do you need to tell HMRC?
If your gross trading income exceeds the relevant trading-allowance threshold and you need to complete Self Assessment, registration deadlines can apply.
Do not leave this until the tax payment deadline.
There can be separate dates for:
- Registering
- Filing the tax return
- Paying the tax
It is worth checking your obligations soon after the end of the tax year in which your side hustle exceeded the relevant threshold.
When is the tax actually paid?
Self Assessment tax is generally paid after the end of the tax year.
This creates a common cashflow mistake.
Someone earns side-hustle income throughout the year and spends all of it.
Then the tax bill arrives later.
Consider setting aside a proportion of profit for:
- Income Tax
- National Insurance where applicable
- Future payments on account
The appropriate percentage depends on your total income and circumstances.
What are payments on account?
If your Self Assessment tax liability reaches certain levels, HMRC may require payments on account towards the following year’s tax bill.
This can make the first significant Self Assessment payment feel unexpectedly large.
You might need to pay:
- Remaining tax for the year just ended
- Plus an advance payment towards the next year
People moving from small casual earnings into a more profitable side business should be aware of this before spending all available cash.
What if the side hustle becomes your main income?
At that point, you should review the wider structure.
You may need to consider:
- Sole trader versus limited company
- VAT registration
- Business insurance
- Pension planning
- Pricing
- Cashflow
- Bookkeeping
- Payments on account
- Whether you need professional accounting support
The tax structure that works for £3,000 of occasional income may not be appropriate for a business generating £70,000 annually.
When might VAT become relevant?
VAT is separate from Income Tax.
If your taxable turnover reaches the VAT-registration threshold, you may need to register.
The threshold is based on turnover rather than profit.
This can catch rapidly growing side businesses by surprise, particularly online sellers and service providers.
Track turnover on a rolling basis rather than only checking at year-end.
Could you use a limited company?
Potentially, but incorporating solely because someone online says it is “more tax efficient” is not always sensible.
A limited company creates additional responsibilities including:
- Annual accounts
- Corporation Tax
- Companies House filings
- Payroll where salary is paid
- Dividend documentation
- Separate company finances
For a relatively small side hustle, operating as a sole trader may remain simpler.
The decision should be based on profit, risk, future plans and personal circumstances.
Common side-hustle tax mistakes
Watch out for:
- Assuming cash income does not count
- Ignoring income from online marketplaces
- Confusing turnover with profit
- Claiming personal expenses
- Keeping no records
- Spending money that will later be needed for tax
- Missing Self Assessment deadlines
- Assuming £1,000 means £1,000 of profit rather than gross trading income
- Incorporating without understanding the extra administration
Frequently Asked Questions
How much can I earn from a side hustle before paying tax?
The £1,000 trading allowance may apply to qualifying gross trading income. Once income exceeds that level, you need to review whether Self Assessment and tax reporting are required.
Do I have to declare income from Vinted or eBay?
It depends on the nature and scale of the activity. Selling your own unwanted possessions is different from regularly buying or producing goods to sell for profit.
Does HMRC know about online sales?
Digital platforms can have information-reporting requirements. You should report taxable income correctly regardless of whether you believe HMRC has received platform data.
Can I claim expenses against side-hustle income?
Potentially, yes. Qualifying business expenses may be deductible where you use actual expenses rather than the trading allowance.
Do I need a separate business bank account?
Not necessarily as a sole trader, but separating finances can make record keeping significantly easier.
Does my salary affect the tax on my side hustle?
Yes. Your taxable side-hustle profit is considered alongside your other taxable income when calculating Income Tax.
Final thoughts
A side hustle does not need to become a large business before tax rules become relevant.
Once you begin earning regularly, understand:
- Your gross income
- Your expenses
- Your taxable profit
- Whether the £1,000 trading allowance applies
- Whether Self Assessment is required
- How much money should be reserved for tax
Keeping records from the beginning makes everything easier if the activity grows.
At Merranti Accounting, we help individuals, sole traders and growing businesses understand their tax obligations and put appropriate accounting systems in place.
Explore our accountancy services or contact Merranti Accounting if your side hustle is starting to become a more substantial source of income.
Written by Jack Smith MAAT
Senior Client Manager, Merranti Accounting
Jack is an AAT-qualified accountant with more than 12 years of experience supporting individuals, sole traders and owner-managed businesses. His work includes accounts, tax planning, forecasting and practical advice for people whose businesses are beginning to grow.
Author image: Use Jack’s existing Merranti headshot.
