If you have a hobby that you want to monetize, starting a side hustle can be a fantastic way to explore the possibility of earning income from something you're passionate about, all while maintaining the security of your current job. However, navigating the obligations and requirements of running a side business can seem overwhelming and deter many people from taking the leap. In this article, we aim to clarify the responsibilities involved in being self-employed while holding a permanent job, so you can confidently consider starting your own side business.
When do I need to inform HMRC about my side hustle and what tax do I need to pay?
HMRC regulations state that you can earn up to £1,000 tax-free in a given tax year (from 6 April to 5 April) without notifying them about your extra income, thanks to their tax-free allowance for self-employed individuals. Nonetheless, it's crucial to keep in mind that not all side jobs are covered by this rule, and some may have different income thresholds that require declaration. For instance, some side jobs with various pay brackets that require you to declare your income include:
Renting out a room in your home - If you earn £7,500 or more per year from renting out a room in your home, you are required to declare this income to HMRC.
Trading stocks and shares - If you make taxable gains of £12,300 or more per year from trading stocks and shares, assuming you have no other chargeable gains during the tax year and you are not registered for Self Assessment, you are required to declare these gains. It's important to note that the allowance for this type of income is decreasing to £6,000 from 6th April 2023.
Selling your old clothes - Income from selling your old clothes is not tax-deductible, but if you buy and sell clothes for a profit, that income would be subject to taxation.
When do I need to register as self-employed?
If you expect to earn more than £1,000 in a tax year from your side hustle or extra income, you will need to register as self-employed. It is important to register with HMRC as self-employed by the 5th of October following the end of the tax year in which you started your side hustle. For instance, if you began your business in June 2022, you would need to register as self-employed by the 5th of October 2023. Registering can be done conveniently online through the Gov.uk website.
How does this affect my main job?
It is advisable to review your employment contract with your current employer to check for any clauses regarding side hustles. Some employment contracts may require you to seek permission from your employer before starting a side hustle.
You should not do side hustle that competes with your employer. Ignoring this obligation could result in dismissal, and many businesses now explicitly include this in their contracts.
As long as there are no conflicts with working time regulations or other contractual obligations, there should be no issues in starting your side hustle alongside your current employment. It's important to ensure that you are in compliance with your employment contract and any legal requirements to avoid any potential conflicts or issues in the future.
Do I need additional insurance for my side hustle?
When starting a side hustle, it's essential to understand that you're essentially running a business. Thus, it's crucial to consider getting the appropriate insurance coverage to protect you in case of any unforeseen events.
There are a few types of insurance covers to consider for your side hustle, including professional indemnity insurance, which protects you if a client experiences financial loss due to poor advice or services. Public liability insurance is another important cover to consider, which provides protection in case someone suffers an injury or financial loss that they blame on your side hustle.
What accounting responsibilities do I have when starting a business?
As a business owner, it is your responsibility to keep accurate records of your income each tax year, and if your earnings exceed the £1,000 threshold, you must submit a Self Assessment by the 31st of January each year and pay income tax and national insurance (NI) contributions, classes 2 and 4. Failure to submit on time may result in significant fines, while failing to pay your taxes and NI contributions could lead to HMRC seizing your assets and vehicles. Moreover, not meeting your tax obligations can also create gaps in your national insurance record, potentially affecting your eligibility for state benefits such as the state pension and maternity allowance.
If your earnings are below the threshold, you are not obligated to keep accounting records, but we still advise doing so.