How to stop emergency tax from draining your side hustle

Could you face a big tax bill just for having a side hustle? Kate Anderson breaks down how side hustlers can avoid emergency tax charges.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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The pandemic has turned us into a nation of side hustlers. Nearly a quarter of people in the UK now have a project on the side to help boost their income. If you’re one of these people, have you thought about the tax implications? What you don’t want is for HMRC to wipe out any extra money you make through emergency tax.

Here, I investigate what emergency tax is and, more importantly, how you can protect your side hustle from it.

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What is the emergency tax?

An emergency tax charge can have a big impact on someone trying to get their side hustle off the ground. Research from Credit Karma found that 49% of side hustlers believe that emergency tax affects their ability to supplement their income – and 59% just think it’s unfair.

So what is it and why does it matter?

Emergency tax can be issued when HMRC doesn’t receive your income details in time after a change in circumstances. This could be any of the following:

  • A new job
  • Working for an employer after being self-employed
  • Getting company benefits or the State Pension

It means that you’ll pay tax on all of your income above the basic Personal Allowance (£12,570 2021/22).

How can you avoid it?

The best way to avoid getting hit with emergency tax is to update your details with HMRC as soon as possible.

If you have started a new job, then give your P45 to your new employer.

For those who were self-employed and are now moving into employment, your new employer should give you a ‘starter checklist’ where you can provide details of your previous income.

If you have started getting company benefits or the State Pension, then you can update your details in the tax code online service or by contacting HMRC.

Unlike PAYE, income earned from a side hustle is untaxed. So it is up to you to inform HMRC of your extra income revenue. If you don’t, it’s not only an emergency tax code you will have to deal with. You could also face fines and interest on late payments.

You can do this by registering as a sole trader. This needs to be done even if you have been on furlough or are otherwise employed. It means that HMRC can then take into account earnings for all the jobs you do and make sure you are paying the right amount of tax.

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Is it possible to avoid tax altogether on a side hustle?

If you are considering a side hustle, it is best to weigh up all the tax implications beforehand. You don’t want your entrepreneurial initiative to be killed off by a big tax bill.

However, there are some scenarios where your side hustle can be tax free.

There are two special tax allowances: the trading allowance and the property allowance. These let you earn up to £1,000 of trading or property income a year and not pay a penny to the taxman.

Trading allowance

This covers the sale of goods and services. So if your side hustle is blogging or baking cakes, this one’s for you.

It’s important to note that the £1,000 figure is turnover. So remember to deduct your expenses (say the ingredients bought to make the cake) and keep a record of your invoices and receipts.

Property allowance

This allowance gives you a tax exemption of up to £1,000 a year if you earn income from land or property.

If your side hustle is something to do with the sharing economy – think renting out your driveway for parking or loft for storage – then this allowance could be a very good thing to know about.

Please note that tax treatment depends on your individual circumstances and may be subject to change in the future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

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