Written 16th January 2024 by James Claughton
What is a side hustle?
A side hustle is an income stream from activity which is not an individual’s primary work. Side hustles have become more popular in recent times, as people look for ways to supplement their salary and meet the seemingly endless increases to the cost of living which has left many in dire need and crisis. However, HMRC have now introduced stricter reporting measures to ensure that side hustles are taxed correctly.
Typical examples of side hustles include selling second hand clothes online, working as a delivery driver, freelance work and even renting out a spare room in your property on websites such as Airbnb.
There are estimated to be around 7.25 million people involved in the so-called “gig economy”, therefore the new rules will affect a large number of people with many unaware that their extra income may push them into a higher tax threshold. It is important to be aware of this and not fall foul of tax laws which may lead to large fines from HMRC and possibly even long and complex tax investigations which nobody would relish the prospect of being part of.
New rules relating to taxes on side hustles
From 1 January 2024, online platforms who facilitate transactions between buyers and sellers including Etsy, Vinted and EBay amongst others now have to report sellers’ financial details to HMRC (should the sellers’ transactions exceed the threshold). Digital platforms are not, however, required to report users with less than 30 sales and earnings of less than £1,000 per year which effectively represents a trading allowance of £1,000. Anything over this threshold is liable to tax.
The new laws on reporting follow the UK signing a global agreement by the Organisation for Economic Cooperation and Development which enables tax officials to share data to other jurisdictions.
The new rules represent a major shift from the previous rules where only a limited number of platforms (including Airbnb) reported income information to HMRC and it largely relied upon self-declarations from individuals which meant it was much harder to monitor tax avoidance.
Whilst there has been quite a lot of media hype around this latest development, it is important to note that the rules on the amount of tax and when this needs to be paid have not actually changed but rather it is the requirement to report for the online platforms which is new.
The reporting obligations will significantly enhance HMRC’s ability to monitor side hustles and they say clamp down on cases involving undeclared earnings. HMRC has invested £39.9 million on a system for reporting online marketplace earnings and has assembled a specialist team of 24 tax officers who will be tasked with examining digital platforms and declared tax income and take enforcement action when required.
What do individuals need to do?
If you earn in excess of £1,000 from a side hustle, then you need to register as self-employed with HMRC and complete a self-assessment tax return detailing income earned. Employees are generally taxed through the PAYE system but operating a side hustle is classed as a form of self-employment for tax purposes and if earnings exceed the threshold then HMRC must be informed.
Penalties for failure to comply
Failure to register as self-employed could lead to a much larger fine than the tax that would be due from earnings. Late payments will accrue interest on top of the fines.
Companies will also face large fines and other penalties for failure to report back on seller’s earnings exceeding the threshold on their platforms.
HMRC has invested heavily into the new systems to include the oversight of side hustles and so it is anticipated that they would seek to pursue matters if, for example they were able to establish tax avoidance although the likelihood of that becoming a major issue as a direct result of the side hustle industry may seem remote.
As indicated, although the new rules created quite a lot of interest in the press and various other sectors, people should not be overly concerned or worried every time they want to sell an unwanted gift or item that has lost its sparkle or use to them That being said, it is also important to remember that if you do find yourself subject to investigation by HMRC or any other body including the police and Trading Standards, it is important to seek expert legal advice as soon as possible.
The team at Olliers have considerable experience in dealing with the full spectrum of criminal and regulatory investigations and proceedings with particular expertise in assisting clients during the pre-charge stage. Please do not hesitate to get in touch and one of our experts will be happy to help.
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James joined Olliers in 2020, having studied Law with Business at the University of Liverpool followed by a Masters in Legal Practice.
James has a particular interest in the investigation stage of cases and has a significant caseload of pre charge cases. He frequently makes representations against charge on behalf of clients under investigation.