Employed with a Side Hustle? How to Pay Tax on Extra Self-Employed Income

Millions of employees in the UK earn extra cash from self-employment. Nothing wrong with that. But if you’re one of them or you’re considering becoming one of them, you need to know whether any tax is payable and how you tell the UK tax authority HMRC about your additional income. Read on to find out the answers to these key questions and others.

Do you need to tell your employer?

In most cases, you don’t have to tell your employer that you’re earning extra income from self-employment – unless your employment contract says otherwise. Employment contracts can be restrictive if there’s a risk that self-employment will conflict with your responsibilities as an employee or impair your ability to do your job.

● For example, doing some work “on the side” for one of your employer’s customers would be a clear conflict, while answering side-hustle phone calls or making deliveries when you’re being paid by your employer would clearly be unacceptable. If you’re in any doubt, speak to your employer.

What is self-employed income?

If you’re just selling off some personal items via eBay or clothes on Vinted, you’re not trading, so no tax is payable. However, if you’re buying stock or materials to use to make things to sell to customers, obviously, you’re trading and that income could be taxable.

That said, everyone gets a trading allowance, which enables you to earn up to £1,000 a year gross income (ie total sales before any expenses are deducted) tax-free. HMRC considers this casual or miscellaneous income, so no need to register or fill in a tax return.

Once your sales income goes over £1,000 in a tax year, Income Tax may be payable, if your total annual income from employment, self-employment and other taxable sources is more than £13,570 (you get a tax-free Personal Allowance of £12,570 as well as your £1,000 trading allowance).

If tax is payable on your self-employed income, you’ll do so via Self Assessment, which is the system HMRC uses to collect Income Tax from “sole traders” (ie people who earn self-employed income).

Registering for Self Assessment

● If you haven’t registered previously, you must do so before 5 October following the end of the tax year (5 April) during which you earned taxable self-employed income. You can be fined if you don’t.
● You register for Self Assessment online via government website GOV.UK.
● You need a Government Gateway user ID and password to register. You can create one when you sign in for the first time. You must give your full name, postal address, date of birth, telephone number and UK National Insurance number. You’ll also be asked why you’re registering. You’ll then get your Unique Taxpayer Reference (UTR) number by post within 15 working days.
● If you’ve registered for Self Assessment before but did not send a tax return last year, you must register again to reactivate your account.

Keeping financial records

You’re required to keep accurate records of your income and expenses, with accurate details of amounts (in and out) and dates. This enables you to reliably complete your tax return. Using good basic accounting software to maintain financial records is highly recommended. It can save you a lot of time and effort when completing your tax return.

HMRC can fine you if your records are not accurate, complete and legible. You can also be asked to provide proof of any tax expenses you’ve claimed. Wrongly claiming expenses and deliberately underreporting your sales to pay less tax can lead to a substantial fine. If you avoid paying tax altogether and get caught, it will lead to a penalty, as well as payment of all backdated tax owed, plus interest.

Self Assessment tax returns

Each year you must complete and file a Self Assessment tax return (the SA100), plus supplementary tax return pages SA103 to report your self-employed income and any tax expenses and allowances you wish to claim. If you receive taxable income from other sources (eg rental income), you may have to complete other supplementary pages.

This is a wide range of allowable expenses that you can claim to reduce your tax bill (you summarise them in your tax return). These are costs that you’ve paid to earn your additional income.

You will need to fill in a separate SA102 Employment supplementary page for each employment (ie job) you have and submit it with your SA100. It will show how much you’ve earned and how much tax your employer has deducted.

Need to know! You must file your Self Assessment tax return before the online-filing deadline of midnight on 31 January, otherwise there’s an immediate £100 fine. If you claim allowable expenses, you cannot claim the trading allowance.

How much additional Income Tax will you pay?

You’ll pay tax on your taxable net profits, which is your sales minus costs/expenses. As well as allowable expenses, other tax allowances and reliefs may also be claimed.

● The Income Tax band into which your total taxable income falls determines how much tax is payable on your self-employed income.
● You’ll pay 20% on £12,571-£50,270; 40% on £50,271-£125,140; and 45% on total taxable income above £125,140 (bands are rates are different in Scotland).
● Class 4 National Insurance contributions can also be payable on self-employed income.

Need to know! After you have submitted your Self Assessment tax return, HMRC will tell you how much tax you owe. The deadlines for paying your tax bill are: 31 January for any tax you owe for the previous tax year (called a “balancing payment”) and your first payment on account (payments towards your next tax bill); 31 July for your second payment on account. You can pay in instalments before the deadline, should you prefer.

GoSimpleTax makes reporting taxable self-employed income via Self Assessment easier, quicker and cheaper than paying an accountant. GoSimpleTax can ensure that all necessary parts of your tax return are completed without basic mistakes, giving you peace of mind. Enjoy a FREE, no obligation trial to find out how GoSimpleTax makes completing tax returns so much simpler.

Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.