The side hustle economy is booming. Whether you’re selling crafts on Etsy, freelancing on Fiverr, or renting a room on Airbnb, you’re part of a growing movement. But with every payment that hits your account, a crucial question arises: “What does this mean for my taxes?”
The short answer is: You are likely self-employed, and you must declare this income to HMRC. Ignoring it is not an option, but managing it is straightforward once you know the rules.
Step 1: The Golden Rule – Understand Your Tax-Free Allowances
Before you worry about paying tax, check if you even need to. Everyone in the UK has two key allowances:
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Trading Allowance: £1,000 per tax year (6th April to 5th April).
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If your total gross income from all your side hustles is less than £1,000 in a tax year, you don’t have to do anything. You don’t need to register or declare it.
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This is a use-it-or-lose-it allowance. You cannot carry it forward.
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Property Allowance: £1,000 per tax year.
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This applies specifically to income from property, such as from Airbnb or renting out a parking space.
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If your gross rental income from a property is below £1,000, you don’t need to declare it.
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Crucial Note: You can use the Trading Allowance OR you can claim actual business expenses. You cannot do both. If your expenses are over £1,000, you are almost always better off claiming expenses instead of using the allowance.
Step 2: Registering for Self Assessment
If your side hustle income exceeds the £1,000 allowance, you must register for Self Assessment with HMRC.
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Deadline: You must register by 5th October following the end of the tax year in which you started earning. For example, if you earned over £1,000 between 6th April 2023 and 5th April 2024, you must register by 5th October 2024.
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How: Register on the GOV.UK website as a “sole trader.” HMRC will then send you a Unique Taxpayer Reference (UTR) to file your return.
Step 3: How to Calculate Your Profit (And Your Tax Bill)
You do not pay tax on your total income. You pay tax on your profit.
Taxable Profit = Gross Income – Allowable Expenses
A. Track Your Gross Income Meticulously
This means every single payment you receive:
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Etsy: Total sales before Etsy fees.
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Fiverr/Upwork: All payments from clients before the platform’s commission.
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Airbnb: The full payout from Airbnb before their service fee.
B. Know Your Allowable Expenses
These are costs incurred “wholly and exclusively” for your business. By claiming these, you legally reduce your profit and your tax bill.
Expenses by Platform:
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For Etsy Sellers:
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Cost of raw materials (fabric, yarn, clay, paint).
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Etsy’s transaction fees, listing fees, and payment processing fees.
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Packaging and postage costs.
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Tools and equipment (e.g., a new sewing machine, but you may need to claim this over several years as a capital allowance).
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A proportion of your home costs if you work from a dedicated office (see below).
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Marketing costs (e.g., business cards, Facebook ads).
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For Fiverr Freelancers (Writers, Designers, Programmers):
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Software subscriptions (Adobe Creative Cloud, Canva Pro, Microsoft Office).
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New laptop, monitor, or specialist equipment (claimed via capital allowances).
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Proportion of your home office costs (heat, electricity, internet, council tax) or use HMRC’s simplified rate of £6 per week without needing receipts.
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Phone bill (business proportion).
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Online courses to improve your skills for your freelance work.
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Bank charges on your business account.
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For Airbnb Hosts:
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If you’re renting a room in your main home: You can use the official Rent-a-Room Scheme (£7,500 tax-free allowance) OR claim actual expenses. You cannot do both.
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If you’re renting a whole property: You can claim a proportion of mortgage interest (but not the capital repayment), utility bills, council tax, insurance, and cleaning costs for the period it is rented.
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General Expenses: Welcome baskets, toiletries, cleaning services, laundry, platform fees.
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Step 4: Filing and Paying Your Tax
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Tax Return Deadline: File your online Self Assessment tax return by 31st January following the end of the tax year.
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Payment Deadline: Pay the tax you owe by 31st January.
What you’ll pay:
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Income Tax on your profits:
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0% on profits up to your Personal Allowance (£12,570)
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20% on profits between £12,571 and £50,270
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40% above £50,270
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National Insurance:
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Class 2: £3.45 per week if profits exceed £12,570 (voluntary if under).
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Class 4: 9% on profits between £12,571 and £50,270, 2% above.
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Beware of Payments on Account: If your tax bill is over £1,000 and less than 80% of your total income was taxed at source (e.g., through a PAYE job), HMRC will ask for “Payments on Account.” This means you pay half your tax bill on 31st January and the other half on 31st July. This catches many new side hustlers by surprise.
Pro Tips for a Stress-Free Side Hustle Tax Experience
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Open a Separate Bank Account: This is the #1 tip for staying organised. It makes tracking income and expenses effortless.
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Save as You Go: Put aside 25-30% of every side hustle payment into a dedicated savings account. When the tax bill arrives, the money is already there.
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Use Digital Tools: A simple spreadsheet is a great start. Consider accounting apps like FreeAgent or QuickBooks that can connect to your bank account and help track everything.
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Keep Every Receipt: Use a digital scanner on your phone. For the £6/week home office claim, you don’t need them, but for everything else, you must have proof.
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Don’t Panic: The system seems daunting, but it’s manageable. If you’re organised, filing your return can take just a couple of hours.
Final Word
Your side hustle is a business, and treating it professionally from day one is the key to long-term success and compliance. By understanding your allowances, tracking your finances, and saving for your tax bill, you can enjoy the extra income without the anxiety of an unexpected letter from HMRC.