Since the pandemic, more and more of us are exploring different hobbies and passions and turning them into a money-making endeavour. With the current cost of living crisis, and the need for that extra bit of cash to spend on luxuries or even a second income to help with the rising costs of bills and interest rates, now is the perfect time to pursue that idea that’s been niggling in the back of your mind.
2023 could well be The Year of the Side Hustle.
The idea to turn a hobby into something profitable has launched the beginning of many successful businesses, which is great news if it’s something you’re wanting to pursue. Instead of taking the plunge and quitting your job straight away, many people dabble with the idea, see if they can build up a customer base or audience for the product or service, and then decide if it’s the right fit for them and their lifestyle.
But what types of side hustles can you turn your hand to? And how will it affect the amount of tax you owe HMRC?
What you can be doing as a side business
Doing your research before you set out on a new side hustle can be paramount to its success. Are you offering a product or service that is popular with demand? Are you offering something that no one else seems to be on the market? What about your competitors, do you think you can do better than them?
There are so many different ways to make an extra income based on your skills and talents.
- Arts & Crafts
Maybe you create your own models, embroider beautiful projects or you’re a keen painter. If you think you could sell your work and build an admiring audience, why not give it a shot.
- Baking & Sweets
Lockdown saw a whole new wave of people developing a love for baking. If you can offer something a little different and market yourself in the right way on social media, you could be booked up for events and occasions all year round. Make sure you have all the right insurance and certificates to do so though.
- Odd jobs & Trades
If you have previously worked in a trade, or you’re handy around the house, offering your services and helping others could be a great way to earn an extra income.
- Social Media & Influencing
Over the last 10 years, this whole new career has come from social media, with many people turning it into their full-time career. Sharing snippets of your life online, through Instagram, TikTok and YouTube predominantly, can lead to an income being generated through brand partnerships, The Creator Fund and sponsorships.
- Property Investment & Landlords
If you have the money to do so, property investment is a great way of making money and saving for the future.
- Second hand sales
You could be sat on a gold mine – or it could just be time to declutter your wardrobe and storage cupboards. Either way, you’re bound to make some extra money by selling your unwanted clothes, toys, homewares and electricals.
Vinted has seen a huge rise in popularity for second hand clothes, with many looking for a bargain. eBay is also a great place to sell any unwanted items. Some even turn it into a career – if you have a keen eye for a bargain yourself, cleaning up other people’s unwanted items and reselling them could generate a steady income.
- Food Delivery & Couriers
If you have the right insurance for your vehicle, you can earn an extra income from delivering food or parcels in your spare time. It can be a great side hustle that can develop into a full time job, allowing you to earn an additional income day or night.
Turning a Hobby into a Business
Once your side hustle is making you a profit, it can be tempting to turn that into a career. To do so, you would need to set up either as a sole trader or a limited company. Gorilla Accounting can help you choose which route to take, and help you with your finances, profitability and taxes.
There are advantages of a sole trader, as well as advantages of setting up a limited company, which you can read more about on our blog.
It’s important to use an online tool such as FreeAgent to log all of your incomings and outgoings, as this will make it easy to send your self-assessment over and pay any tax owed to HMRC.
Do I need to pay tax on my earnings?
If you have a side hustle, one worry could be the amount of tax you have to pay on any earnings that you take from it, especially if you continue to work full or part time within your current role. However, there are tax-free trading and property allowances that offer some leniency and reduce the amount of tax you have to pay on income you receive.
If you earn money from trading activities, such as selling online on platforms like eBay, or by offering a freelance service, you can earn £1,000 tax free as the ‘trading allowance’.
Additionally, if you earn money through a property that you let out, you can earn £1,000 before paying tax on that income too. This could be if you rent out a room whilst on holiday, or someone pays to use your garden for a weekend.
If you earn more than £1,000 from renting out your property, it is worth looking at the Rent a Room scheme instead, as there are different rules on tax for rental income.
Both allowances can be claimed at once.
When you get to a point where you are earning more than the tax-free allowance, you will need to pay HMRC the appropriate amount of tax through a self-assessment.
Understanding Your Tax
It can be slightly confusing working out how much tax you owe, especially as the self-assessment deadline is looming once again. We’ve pulled together an at a glance guide to tax allowances and thresholds, so you know exactly where you stand.
Personal tax-free allowance 2022-23
- Most people are allowed to receive a certain amount of income before having to pay income tax.
- This is known as the basic personal allowance, which is £12,570.
- The higher rate tax threshold is £50,270 and both this and the personal allowance will be fixed until April 2028 at the earliest.
- The threshold at which individuals begin paying the additional rate of income tax has been reduced from £150,000 to £125,140.
Reduction in dividends allowance
- The dividend nil rate band will reduce from £2,000 in the current 2022/23 tax year to £1,000 in the 2023/24 tax year and £500 in the 2024/25 tax year.
- The rates at which dividends are taxed will remain as follows.
o Basic rate (income up to £50,270) – 8.75%
o Higher rate (Income up to £125,140) – 33.75%
o Additional rate (income above £125,141) – 39.35%
Corporation tax
- From April 2023 the main rate of corporation tax will increase from 19% to 25%.
- This will only apply to those companies’ generating profits of £250,000 or more – so may not apply to your side hustle if you set up as a sole trader or limited company.
- Those with profits of £50,000 or less will continue to pay corporation tax at a rate of 19%.
- Between the two thresholds of £50,000 and £250,000 a marginal rate of 26.5% will apply.
Capital Gains Tax
- From April 2023 the tax-free capital gains allowance will reduce from £12,300 to £6,000
- From April 24 it will reduce to £3,000.
- For individuals who are married and living together, assets can be transferred from one another to utilise the annual tax free capital gains allowance of both individuals when looking to dispose of an asset, such as shares held outside of an ISA or property.
MTD ITSA
- Making Tax Digital (MTD) for Income Tax Self-Assessment was originally planned to be implemented from April 2024
- It has now been delayed a further two years and will only come into play from April 2026.
- The income threshold in which an individual would need to comply with these rules has been increased from £10,000 to £50,000 and this is effective from April 2026.
- From April 2027, those with income of £30,000 or more from self-employment income and/or rental income will also have to comply.
If your side hustle takes off, you’ll need to be ready for MTD kicking in. Thankfully with Gorilla, you get full inclusive access to FreeAgent, a fully MTD compliant bookkeeping software, making sure you’re in a prime position to make those submissions.
Personal savings allowance
It’s worth noting that you are allowed to generate a certain amount of income from the interest on your savings each year, should you want to put away any extra income you earn for a later date.
- Basic-rate taxpayers can earn up to £1,000 in savings interest for 2022-23
- Higher-rate taxpayers can earn up to £500 in savings interest for 2022-23
- Additional-rate taxpayers will not have a personal savings allowance.
If you have a second income and need some help with your accounting, Gorilla are expert accountants for small businesses, freelancers and sole traders. You can contact us by calling 0330 107 9674, or fill in our online form here.
