How to File Taxes for Your Side Hustle

Are you one of millions working a side hustle alongside a full-time job? This handy guide shows you how to follow the tax rules for additional income.

Please note that this article is intended for educational purposes only and should not be deemed to be or used as legal, employment, or health & safety advice. For guidance or advice specific to your business, consult with a qualified professional.

A side hustle can be loosely defined as any money-making activity that falls outside of the parameters of your primary job. Statistics show that at least 1.1 million people in the UK have a second job or are self-employed and have an employed position. If you’re one of them, knowing how to manage your taxes through self-assessment will help you organise your finances effectively.

The rise of side hustles

Side hustles or second jobs are on the rise in the UK, with around a quarter of adults claiming to have some form of secondary income. This can range from a self-employed business on the side to something as simple as earning money from tutoring or even selling vintage clothing online. One study found that as many as two-thirds of all people earning additional income were unsure how to manage their taxes, and as many as a quarter could be committing tax fraud.

It does not matter whether your employed or self-employed income is the primary source of finance. Actors temporarily working as waiters must declare both sets of income just as a full-time office worker must declare teaching piano on weekends. Some people choose to take secondary employment or set themselves up as self-employed on the side to generate additional income. Others explore their entrepreneurial sides while maintaining the safety net of a regular salary while they see if their business idea is likely to prove successful. Whatever the reason for your side hustle, learning from the get-go how to manage side business taxes helps prevent any financial or legal issues appearing.

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How to take payments for your side hustle

Setting up as a sole trader or limited company can be easy to do with the right tools. In the modern digital age, taking payments for goods and services online or via credit or debit cards is essential. The Square Payment Links provides everything a small business needs to accept online payments, with no monthly fees and a low cost per transaction. For online sellers, the Square Online Store offers an easy way to establish an online presence and sell goods over the internet, with links to social media to help with marketing.

The Square contactless card reader facilitates chip and PIN or contactless payments by card from anywhere and is small enough to carry to appointments if required. The Square invoicing system lets businesses that do not always operate with advance payments keep track of everything owed and generate invoices quickly and easily.

What are the tax rules around side hustles, and when do you need to start paying tax on your earnings?

The law in the UK for tax on second job self-employed income states that you must declare any additional income over £1,000 per year through self-assessment for tax purposes, and anyone earning more than that needs to register as self-employed. This could be as a sole trader or by setting up a limited company, each with different tax responsibilities.

When setting up as a sole trader, the law requires individuals to register and start declaring their earnings before the 5th of October in their second financial year of business. This gives plenty of leeway, but the sooner, the better in terms of managing finances. Even those who wait for the deadline will be liable to pay taxes on their first year of self-employment, so setting up early reduces the chance of receiving a double bill in year two.

What you need to do to prepare for filing your taxes for your side hustle

HMRC automatically calculates the amount of tax and National Insurance due when a self-assessment tax form is filled in at the end of each tax year. However, having an idea in advance of what will be due can help you better manage your finances, making sure you have enough set aside for your annual tax bill. Each individual in the UK gets an annual tax-free allowance, which is currently set at £12,570. Any earnings over this are liable for tax.

There are also two different sets of National Insurance contributions to consider, which can be paid throughout the year by direct debit. One of the benefits of being self-employed is that you can offset various expenses against tax bills – tax is only payable on profit, not total income.

If you’re setting up as self-employed, it’s a good idea to keep detailed records of your incomings and outgoings for side job tax reporting, with receipts, invoices and bank statements to back up the information that you’ll file in your tax return. If this isn’t your strong point, it could be worth hiring a professional to keep track of records and ensure all the correct information is declared and backed up.

How you pay your taxes

The UK financial year runs from the 5th of April each year, and as a self-employed individual you have a grace period in which to file your tax return, which runs to either October or the following January, depending on whether you submit your taxes online or not. Sole traders can pay in instalments providing your returns and all information is up to date. You can also pay taxes via debit card, online bank transfer, cheque or, in the case of limited companies, using a corporate credit card.

Organising taxes after years of employment might sound daunting, but the right tools and organisation can make it a breeze. Payment software from Square automatically stores all you need within the system, helping you to learn and file taxes easily. HMRC makes the calculations once your return is filed, and you’ll then have several months to make your final payment.