Side hustles are a popular way to earn extra money on top of a regular job but there are warnings that people trying to boost their income may face unexpected tax bills.
With inflation remaining high, it is unsurprising that many people are looking for ways to earn additional income streams.
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This extra work, on top of a full-time job, is typically associated with selling items online, dog walking or renting out a room – or even from more risky crypto trading.
The content creator economy in the UK is worth more than £2 billion according to YouTube.
Sometimes experiences or products will be gifted, and often no money will actually change hands, but new guidance has appeared on HMRC’s side hustle website in recent months warning: “When working out your income from creating online content, you must include the value of any gifts or services you received from promoting products online. That’s because these count as income.”
In one example, HMRC said if a brand paid you £700 last year to post product review videos online and gifted you the products worth £300, and then you made £200 from adverts on the videos, your total income will be £1,200 – above the £1,000 tax-free threshold.
Lee Murphy, managing director of online accountancy service The Accountancy Partnership, said: “If you receive something for free and the brand doesn’t expect anything in return, it’s not taxable. It’s a bit like getting a present from your grandmother, she gives it to you because she likes you, not because she wants a shoutout on Instagram.
How to report side hustle earnings to HMRC
Depending on your overall income, any earnings above £1,000 from a side hustle may have to be reported to HMRC through self-assessment – before the deadline.
The return and any untaxed earnings owed to HMRC for the previous tax year is due online by 31 January and you could get fined for failing to pay.
HMRC research shows many people are unaware that they may owe the taxman money for so-called side hustles.
Myrtle Lloyd, HMRC’s director general for customer services, said: “Whether you are selling handmade crafts online, creating digital content, or renting out property, understanding your tax obligations is essential. If you earn more than £1,000 from these activities, you may need to complete a self assessment tax return.
“Filing early puts you in control – you will know exactly what you owe, can plan your payments, and avoid the stress of the January rush. You don’t need to pay immediately when you file – you have until 31 January to settle your tax bill.”
Filing early can have other benefits as you will know how much you need to save for your tax bill by the end of January.
Increasing numbers of people have been caught by the self-assessment net in recent years due to frozen tax thresholds. The dividend and capital gains tax allowances have also been slashed, upping the amount of tax to pay on assets.
It comes as HMRC is still working on a new service that could mean up to 300,000 earning extra income from a side hustle may be given an escape from the administrative burden of self-assessment..
How is 'side hustle' tax changing?
Currently, individuals have a trading allowance that makes them exempt from tax for the first £1,000 earned each tax year from what HMRC describes as casual services such as babysitting and gardening.
It can also be used when selling items on popular websites such as eBay and Vinted.
If they make profits above this level, they need to submit a tax return.
However, while the tax-free trading allowance will remain the same, the government has announced that it will raise the reporting threshold for trading income from £1,000 to £3,000, so those earning less than £3,000 won't need to file a tax return.
People with taxable income below the increased threshold, for example from “side hustles”, will instead be able to report tax through a new digital reporting service. Taxpayers will have a choice: they can remain in self-assessment if they wish or use the new service. This simplification will help to cut waste and improve services and avoid unnecessary worry for customers, according to HMRC.
Eve Williams, chief executive of eBay UK, said: “This will be welcome news for thousands of UK sellers for whom eBay is a side hustle and a means of supplementing their household income during challenging times.
"By removing the paperwork associated with selling online, hopefully we will help these side hustles grow into fully fledged small businesses."
No date has been given for the change but the government said it would be by the end of this parliament, which would mean by 2029.
Will I have to pay tax on my 'side hustle'?
The Treasury estimates that raising the reporting threshold for trading income from £1,000 to £3,000 will benefit around 300,000 taxpayers.
An estimated 90,000 of them will have no tax to pay and no reason to report their trading income to HMRC in the future at all.
Others will be able to pay any tax they owe through a simple online service.
Laura Suter, director of personal finance for AJ Bell, said: “With HMRC overwhelmed by the number of people calling their helplines and filing tax returns, any move that alleviates this pressure has to be welcomed.
"Changes to the tax system in recent years mean millions more people have been dragged into paying tax, many of them needing help and support from HMRC. But the taxman is finding it all very taxing, and has struggled to meet this surging demand.
“The government itself says that 90,000 of those filing a self-assessment tax return for this income have no tax to pay, meaning they are needlessly filling out paperwork that HMRC is collecting no tax for. Solving these absurd quirks in the tax system should be applauded. However, the timelines on bringing in this measure are spectacularly vague."
Until these changes come in, it is important to file a tax return if you make £1,000 or more from your side hustle.
Anyone who thinks they may need to complete a tax return can use the checker tool on GOV.UK to find out.
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