When does a side hustle become a business, and what tax obligations do you have?

Starting a side hustle can be an exciting way to explore a passion or supplement income. However, as it grows, it’s crucial to understand when your venture transitions into a business and the accompanying tax obligations. Here’s a guide to help you navigate these considerations.


The rise of side hustles in the UK

Since the onset of COVID-19, there has been a notable increase in the number of people starting side hustles. A survey revealed that one in five Brits has started a side hustle since March 2020, driven by various factors, including the need for additional income and more flexible working conditions.

Notably, over 55% of these ventures were initiated during the pandemic, reflecting a significant movement towards entrepreneurial activities at home​​.


Defining a trade for tax purposes

When HMRC evaluates whether an activity qualifies as a trade, it considers factors such as the regularity and nature of the activities involved, as well as the intent to make a profit. Regularity implies consistent, ongoing efforts rather than sporadic or occasional transactions.

The profit motive is also crucial; the activity must aim to generate income beyond just covering its costs. If these conditions are met, the activity is likely considered a trade, and thus subject to business tax obligations. This classification moves the activity from a casual hobby to a taxable business, necessitating a more structured approach to record-keeping and financial management.


Understanding the trading allowance

The trading allowance is a key consideration for those running small ventures or side hustles in the UK. This provision allows individuals to earn up to £1,000 per year from such activities without having to report this income to HMRC. It’s designed to simplify the tax process for small earners, reducing administrative burdens.

However, if your earnings from these activities exceed the £1,000 threshold, you must declare this as income. This involves registering as self-employed and potentially filing a self-assessment tax return. The necessity to file depends on total income levels and whether other income sources require a tax return. This process ensures that all income is properly taxed.


Tax obligations for the self-employed

Once your side hustle is deemed a business, you’ll manage tax responsibilities as a self-employed individual in the UK. This status requires you to file an annual self-assessment tax return. The process includes reporting all forms of income, not just what you earn from your business.

You’ll need to calculate how much tax and National Insurance contributions (NICs) you owe based on total income, which includes earnings from employment, interest on savings, dividends, and rental income, among others. If your business income is below £1,000, it qualifies for the trading allowance and doesn’t need to be reported.

However, surpassing this threshold means you must include it in your tax calculations, alongside any other taxable income. This comprehensive approach ensures all your earnings are assessed appropriately, maintaining compliance with HMRC regulations.


When to consider more formal business structures

As your side hustle expands, you may find the limited company structure increasingly appealing. This entity type separates your personal assets from business liabilities, offering protection under circumstances of financial loss. However, it involves stringent financial and administrative duties, including maintaining proper accounts, regular filings with Companies House, and adherence to corporate governance standards.

These responsibilities are more demanding than those required of sole traders. To help manage these duties, engaging with an accountant can be invaluable. They can offer tailored advice on compliance with UK tax laws and help determine your business’s optimal structure, ensuring legal protection and tax efficiency.


Get in touch

Deciding when your side hustle has become a bona fide business can be challenging. If you’re finding success and seeing your hobby evolve into a potential career, it may be time to formalise your venture.

Pearson May is here to help you understand and manage the tax implications of your growing business. We offer personalised advice and support. Whether you’re just starting out or ready to take the next step, we’ll ensure that you’re on the right track with your tax and business planning.

Get in touch to ease your transition from side hustle to business.

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