With the cost-of-living soaring, many of us are looking to make a bit of extra cash in our spare time. After all, there’s more opportunity to earn money online than ever. But before you jump in, it’s worth doing your homework, especially around bookkeeping and tax.
We’ve put this article together to get you started so you can concentrate on running your business.
What’s the difference between a job and a side hustle?
A side hustle is basically something you do to earn additional income when you’re not working at your main job. For example, you may be a full-time office worker by day but in the evenings, you use Etsy to sell paintings you’ve made.
Perhaps you’re working part-time, and have decided to fill in your hours by becoming a freelance writer. Or maybe you just fancy making extra money by doing something totally different to your day job. A construction worker offering a weekend dog walking service maybe.
In the eyes of HMRC, the biggest difference between a side hustle and a main job is the amount you earn. If your earnings from your side hustle are under £1,000 in one tax year, it won’t be classed as taxable income, thanks to what’s called the Trading Allowance. This means you won’t need to declare this income to HMRC or register as self-employed.
What happens if I go over the Trading Allowance?
Once you’ve made more than £1,000 in one tax year, you’ll need to register your business for tax with HMRC. The only way you’ll know when you’ve gone over the £1,000 threshold is with accurate bookkeeping.
When looking to register for tax, you first need decide how your business will be structured. Many people running a side hustle will simply set up as a sole trader because it’s the quickest and easiest way of doing things.
Some, however, will go for the limited company option instead, particularly if it’s hoped the business will grow from being a side hustle to something bigger. There are pros and cons to both which is why it’s worth getting professional advice if you’re not sure.
If you do decide to run your side hustle as a sole trader, you’ll need to register for Self Assessment through your government gateway account, and submit tax returns telling HMRC about your earnings.
A Unique Taxpayer Reference (UTR) number will be sent out to you within 10 days of registering. It will arrive by post, and you’ll need it to so you can submit your tax returns online. Keep it safe!
Why is good bookkeeping important for my side hustle?
There are many reasons why it’s always good practice to keep up-to-date, accurate records when running your own small business or side hustle. Here are some of the key ones:
To monitor your earnings without going over the Trading Allowance
As mentioned above, if your turnover is less than £1,000 a year from your side hustle you don’t need to pay any tax on it due to the Trading Allowance, or even declare it to HMRC. You’ll need to monitor your self-employed income so that you know where your earnings are in relation to the threshold!
So you know how much you’ve made and what to report to HMRC
Completing your Self Assessment tax return accurately is extremely important. Any errors can lead to you to paying more tax than you need to, and let’s face it, no-one wants to do that. However, underpaying tax – even if you didn’t mean to – can land you in serious bother with HMRC. If discovered, you’ll not only need to pay the tax that you owe, but you’ll also need to pay interest and potentially a fine on top.
By maintaining a good bookkeeping regime, you’ll record exactly what money you’ve made, and what your expenses are. This will be instrumental in helping you or your accountant work out what tax you need to pay.
So you know how much you spend on the business
Running a business costs money. Everything from buying stock, paying website costs, utility bills, running your car, forking out for postage, and paying out packaging costs all come into the mix, to name just a few. Knowing what your business spends, and where, can help you make much more effective decisions.
To claim tax relief
The good news is you can reduce your side hustle tax bill by claiming allowable expenses. This is another reason why it’s really important to keep a record of the things you’ve had to pay out for, and keep your receipts too.
Essentially, anything you need to buy for your side hustle business will reduce your profits, and because you pay tax based on your profits, not your income, it makes sense to make sure you claim everything!
If you carry out your side hustle from home, you can claim a proportion of the costs for:
- Utilities, including water rates, council tax, heating, and lighting
- Insurance
- General maintenance and cleaning
- Mortgage interest
Bear in mind that you can’t write all your bills off as a whole (sadly!). Instead, you should apportion them to the actual time you spent working on your side hustle at home. How much you can claim will also be based on things like the number of rooms you’re using. You may be able to use HMRC’s simplified expenses system if you work 25 hours a month or more from home.
Another thing to note is whether you need to change your home insurance. It’s worth getting in touch with your insurance provider to make sure your home is covered for business use.
As you can see, effective bookkeeping is essential in keeping track of your business income and outgoings. It also allows you to better understand where money can be saved on your tax bill whilst avoiding hot water with HMRC. Sign up to create your free Pandle account and get on top of your bookkeeping today.
