The new HMRC tax on side hustles, which came into force on January 1, 2024. The key factor determining your tax obligation is exceeding the £1,000 annual earnings threshold (before deducting expenses) through any platform.
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New HMRC Tax on Side Hustles
The UK government has implemented new measures, often referred to as the “side hustle tax,” to target individuals earning income from online platforms such as eBay, Amazon, Airbnb, and Etsy.
The new rules, which came into force on January 1, 2024, require these platforms to report the income of their sellers directly to HM Revenue & Customs (HMRC).
HMRC has allocated £36.69 million and employed 24 full-time staff to enforce these new measures, which are expected to have a significant impact on up to five million sellers.
The threshold for paying income tax on earnings from online side hustles is set at more than £1,000 a year.
New HMRC Tax on Side Hustles Eligibility
Eligibility for these changes:
- Anyone earning over £1,000 per year (before expenses) on any online platform selling goods or services: This includes platforms like eBay, Etsy, Airbnb, Deliveroo, Fiverr, and many others.
- Individuals providing services through online platforms: This could include freelance work, tutoring, pet sitting, or any other service offered through these platforms.
How can taxpayers calculate their tax liability for side hustles under the new rules?
Under the new rules, taxpayers can calculate their tax liability for side hustles by following these steps:
- Determine your earnings: Calculate the total income from your side hustle, including any profits from selling goods online, renting out property, or providing services.
- Apply the £1,000 threshold: If your earnings from side hustles are below £1,000, you do not need to register as self-employed or report your earnings to HMRC. If your earnings exceed this threshold, you must proceed to the next step.
- Register as self-employed: If your earnings from side hustles exceed the £1,000 threshold, you must register as self-employed and file a tax return at the end of the year.
- Document each transaction: Keep a clear record of all transactions, including the date, amount, and description of the goods or services exchanged.
- Report your earnings to HMRC: Online platforms, such as eBay, Airbnb, and Etsy, are now required to report the income of their sellers directly to HMRC. Provide the requested information, including your tax ID, bank account details, and the total amount of transactions.
- Calculate your tax liability: Based on your reported earnings, calculate your tax liability using the UK’s income tax system. The tax rate depends on your combined income from your main job and side hustle.
- Pay National Insurance Contributions (NICs): In addition to income tax, you may also need to pay NICs, depending on your earnings and employment status.
What are the tax deductions available for side hustles under the new rules?
Tax deductions available for side hustles under the new rules in the UK include:
- Allowable expenses: Taxpayers can claim deductions for expenses incurred while earning income from the side hustle, such as office supplies, equipment, and travel expenses related to the side hustle.
- Home office expenses: Taxpayers can deduct expenses related to their home office, such as rent, utilities, and internet bills, if they use a portion of their home exclusively for their side hustle.
- Pension contributions: Taxpayers can contribute to a personal pension plan or a 401(k) plan to reduce their taxable income.
- Equipment and supplies: Taxpayers can deduct the cost of equipment and supplies needed to uphold their side hustle, such as a laptop, camera, or tools.
- Services paid for: Taxpayers can deduct the cost of services paid for to do their side hustle, such as hiring a virtual assistant or a graphic designer.
How will the new HMRC tax on side hustles affect taxpayers?
The new rules will affect taxpayers in the following ways:
- Reporting requirements: Platforms like eBay, Airbnb, and Etsy are now required to report the income of their sellers directly to HMRC, making it easier for sellers to comply with tax laws.
- Tax threshold: Taxpayers can earn up to £1,000 a year from side hustles tax-free. However, if the earnings exceed this threshold, the sellers must register as self-employed and file a tax return at the end of the year.
- Increased awareness: The new rules make it more important for taxpayers to keep a clear record of their additional income and understand their tax obligations.
- Data sharing: Firms like eBay, Vinted, Etsy, and Airbnb must collect details of their users and share them with HMRC directly.
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