MoneyMagpie Editor and financial expert Vicky Parry warns those with a side hustle to be aware of common tax mistakes
More of us are turning to side hustles these days, as the cost of living rises and we need to find more cash to stretch out to the end of the month.
But if you make more than £1,000 a year in side hustle job earnings, you could fall foul of HMRC if you don’t take these steps.
Understanding your Trading Allowance
The Trading Allowance is a £1,000 limit that means you can turn over up to that amount without declaring it to HMRC each year. This is your gross turnover: even if you have expenses that mean you have less than £1,000 profit, if your total income is more than £1,000 you must register with HMRC.
There are some limitations to the Trading Allowance. For example, earnings must be from casual services, such as babysitting or helping someone with their garden, or from self-employment. You can also earn an extra £1,000 income from property, separate from the Trading Allowance for business.
Some people cannot use the allowances, such as those who own a company or people who deduct expenses from the Rent a Room scheme. Full details are on the Gov.uk website.
Register for self-employment
If you turn over more than £1,000 a year from self-employment or property income, you need to register with HMRC. This means you need to complete a self assessment tax return every year.
You can write off some expenses against your tax bill. So, even if you haven’t yet earned the Trading Allowance limit, it is often beneficial to register as self-employed if you have large set-up expenses.
What you can claim on tax expenses
You can claim reasonable expenses for the operational costs for your business. This can include things like buying inventory to sell, or costs for running your business such as website, mobile phone, and broadband costs.
You can claim for things like:
- Using your car, van, or motorbike to get to meetings or clients
- The cost of contractor fees
- The cost of legal and financial fees, including bank fees
- Training courses if they further your original field of work (not something completely new)
- Marketing costs like flyers, digital adverts, or attending events
There is a full list on the GOV.UK. However, sometimes things can be vague or industry-specific, so it is also important to use your common sense and make sure the cost could be considered reasonable for your line of work.
For example, writers may be able to claim cinema and theatre tickets because they need to research current trends in their field, but someone who runs a landscaping business could not.
You can also add a portion of your house costs if you work from home, such as your electricity, broadband, and heating. This must be worked out at a reasonable rate. For example, most people who work from home all the time add up the cost of their utilities bills for the year and divide that figure by the number of rooms in the house. If you work from home only some of the time, this figure is further divided by the average number of days a week you work at home.
What you can’t write off
The cardinal rule of tax expenses is to ask yourself: “Is this wholly for the purpose of the business?”
And that can get a bit confusing when you use something both for work and home. For example, if you buy a laptop for work but also use it for personal activities, it is not wholly for business use. You can only claim the reasonable proportion of the cost for your business. If it cost £1,000 and you use it 50% of the time for work, then only £500 would go on your tax return.
You also cannot write off things that are not for your business use. For example, you cannot claim for clothes, even if you need to buy some smart outfits to meet clients. Again, this is down to reasonable consideration: an actor can claim some clothing if it is purchased for their work. You can also claim for branded uniforms, as they are for work and marketing use.
Making Tax Digital
Starting April 2026, self-employed sole traders and landlords will face the switch to Making Tax Digital. For most people starting a business this year, they will have a year or two to prepare. But if you turn over £50,000 or more, you must adhere to the MTD processes from April 2026.
This means you must use accounting software that is HMRC-approved, and submit a quarterly return as well as the annual Self Assessment. The idea behind this is that it should make it easier to budget for your annual tax payments, and gives HMRC more accurate reporting.
Most business bank accounts now come with approved software like Freeagent or Xero. This means your transactions are automatically recorded and easy to categorise, so your quarterly reports are done in just a few clicks.
January 31 deadline
When you first become self-employed it can be easy to be confused by tax deadlines. With the introduction of Making Tax Digital, this means even more dates to remember.
The most important date every year is January 31. This is the date by which your tax return for the previous tax year must be submitted and paid. For example, by January 31, 2026, you must have submitted your tax return for the 2024/2025 tax year. A tax year runs from April 6 to April 5 the following year.
Don’t get caught out with payments on account
If your tax bill is more than £1,000, you will also need to make Payments on Account. This often catches out the newly self-employed.
Your first Payment on Account is 50% of your total previous tax bill, paid at the same time (by 31st January) as your previous tax bill. So, if your last bill came to £3,000, you would pay a total of £4,500. That is made up of the £3,000 bill plus the 50% (£1500) for the next tax year.
Then, you must pay the balance by 31st July each year – the next £1,500. The idea is that, when you submit your next tax return, you will have mostly paid your tax bill and have only small adjustments to make.
Assuming you earn about the same amount each year, after your first year you should be essentially paying your tax bill in advance every January and July. If you know that you will not earn as much the following tax year, you can request to reduce your Payment on Account – but be warned, if you do this and then earn the same or more as before, you will have to pay the difference AND be charged interest.
Hire an accountant
Most people with a side hustle think an accountant is too expensive or not necessary. However, many accountants will offer an annual service to do your tax return for a small fee, around £200 to £300. Remember, this fee can be classed as an expense, too.
Keeping accurate records and receipts makes it really easy – and therefore, cheap – for an accountant to submit on your behalf. It adds an extra layer of protection to ensure you are doing everything right, but also they will know if you can save more money than you expected by using various, more complex, tax allowances and expenses rules. An accountant can often be worth their weight in gold, so it’s important to consider using one.
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