Rising Tax Returns Allowance for Side Hustles: What You Need to Know

As the gig economy continues to thrive, an increasing number of individuals are turning to side hustles as a way to supplement their income. From freelance writing to online retail and tutoring, side hustles have become a significant part of how people earn extra money. However, many side hustlers are unfamiliar with the tax implications of these activities, leading to confusion and anxiety when it comes time to file tax returns.

The good news is that the UK government has introduced a rising tax returns allowance that offers side hustlers a tax-free threshold for income earned from trading or self-employment. This allowance provides significant relief, especially for small-scale entrepreneurs and freelancers who may not generate a full-time income from their side hustle.

In this comprehensive article, we will explore what the tax returns allowance is, how it works, its recent increase, and why it’s essential for those with side hustles. We will also highlight important tax considerations and provide guidance on how to manage your finances as a side hustler.

What is the Tax Returns Allowance?

The tax returns allowance is a government initiative that allows individuals to earn a certain amount of income from self-employment or trading without being taxed. Essentially, the allowance is a form of tax relief that helps side hustlers keep more of the money they earn from their small businesses or freelance work. For many side hustlers, this tax-free threshold is invaluable, offering them a way to grow their side hustle without the immediate burden of tax liabilities.

Currently, the tax returns allowance in the UK stands at £1,000. This means that if you earn up to £1,000 from a side hustle, you do not need to pay tax on that income. You are also not required to report this income on your tax return. The tax returns allowance serves as a practical means of encouraging entrepreneurship while ensuring that small-scale earners are not overburdened by taxes in the early stages of their business.

How Does the Tax Returns Allowance Work?

To understand how the tax returns allowance functions, let’s break it down:

Income Below £1,000: If your income from self-employment or trading is £1,000 or less in a tax year, you don’t have to pay tax on it. You won’t need to include this income in your self-assessment tax return, making the process easier and more streamlined.
Income Above £1,000: If your income from side hustles exceeds £1,000, you will need to report the income on your self-assessment tax return. However, the tax returns allowance will reduce your taxable income by £1,000, effectively lowering the amount of income that is subject to taxation. You may still be required to pay taxes, but the allowance ensures that you aren’t taxed on the first £1,000 of your earnings.

It’s important to remember that the tax returns allowance applies only to trading and self-employment income. It does not cover other types of income, such as employment wages or income from property rentals. However, for many side hustlers, this tax-free threshold significantly reduces their tax burden and simplifies their financial management.

The Rising Tax-Free Trading Allowance: Benefits for Side Hustlers

Over the years, the government has gradually increased the tax returns allowance in order to support the growing number of individuals engaged in side hustles. This rise in the tax-free allowance offers several benefits:

1. Increased Financial Flexibility

The rising tax returns allowance means that side hustlers can earn more without the immediate obligation to pay taxes. This increased financial flexibility makes it easier for side hustlers to reinvest their earnings into their businesses, whether it’s buying new equipment, marketing products, or covering operational expenses. With the added allowance, side hustlers have more freedom to experiment with new ideas or grow their businesses without the looming threat of tax liabilities.

2. Encouraging Entrepreneurship

The tax returns allowance provides a cushion for new entrepreneurs, allowing them to test the waters without taking on significant tax risks. Whether you’re starting an e-commerce shop or offering freelance services, this allowance enables you to build your business without worrying about tax obligations early on. The rising allowance has been particularly helpful for those who want to transition from a side hustle to a full-time business, giving them the breathing room to grow their income gradually.

3. Simplified Tax Filing

When your income falls within the tax returns allowance, tax filing becomes much simpler. You don’t have to provide detailed records of your income or pay tax on your earnings. This streamlined process makes it easier for side hustlers, particularly those with limited experience in managing taxes, to handle their finances. For anyone with a small-scale business or side hustle, this simplicity is a significant advantage.

Recent Changes to the Tax Returns Allowance

The tax returns allowance has seen gradual increases over the past few years, reflecting the growing demand for tax relief in the gig economy. These increases have been made to help alleviate the pressure on individuals who are making less than £1,000 from their side hustles but still want to contribute to the economy.

In addition to the £1,000 tax returns allowance, side hustlers can also benefit from other tax reliefs, such as:

Personal allowance: This is the amount of income you can earn before paying income tax. It is separate from the tax returns allowance and is a general allowance available to all taxpayers.
Expenses: You can deduct certain business expenses, such as office supplies, business travel, and equipment, which can lower your taxable income further.

With the tax returns allowance rising, more and more people are finding it easier to manage their side hustles without feeling overwhelmed by taxes. These changes are designed to support the ever-growing number of self-employed individuals and help them keep their financial lives organized and manageable.

Tax Considerations for Side Hustlers

While the tax returns allowance offers significant relief, side hustlers should still be mindful of other tax obligations, particularly when their income exceeds the £1,000 threshold. Here are some key considerations for side hustlers when it comes to taxes:

1. Tracking Your Income

It’s crucial to keep accurate records of your income and expenses, even if your earnings fall below the tax return allowance. If your income is close to or exceeds the £1,000 limit, proper record-keeping can help you ensure that you’re staying within the tax-free allowance. It can also make it easier to submit your self-assessment tax return should your income surpass the threshold.

2. Self-Assessment Tax Return

Once your income from your side hustle exceeds the £1,000 tax returns allowance, you will need to complete a self-assessment tax return. This process requires you to report all of your income, including earnings from your side hustle. You will also need to report any business expenses that can be deducted from your taxable income. Many side hustlers find it helpful to seek professional guidance during this process to ensure they are filing their returns correctly.

3. Other Allowances and Reliefs

In addition to the tax returns allowance, there are other tax reliefs available to small businesses and self-employed individuals. These include:

Trading allowance: A tax relief available for individuals who trade or provide services.
Capital allowances: Available for self-employed individuals who purchase equipment for their business.

Understanding these allowances and how they work in conjunction with the tax returns allowance can help you minimize your tax liability.

How Husein Accountants Can Help

Managing your taxes as a side hustler can be confusing, especially when it comes to understanding the intricacies of the tax returns allowance. This is where Husein Accountants can provide valuable support. Our team of experts can help you navigate the complexities of tax filing, ensuring that you’re taking full advantage of the tax-free allowance and any other applicable reliefs. Whether you’re just starting or looking to expand your side hustle, we can help you manage your finances efficiently and ensure compliance with tax regulations.

Conclusion

The rising tax returns allowance is a welcome development for side hustlers in the UK. It provides an important tax-free threshold, making it easier for individuals to earn money from their side hustles without facing immediate tax liabilities. As the gig economy continues to expand, this allowance offers financial flexibility, encourages entrepreneurship, and simplifies the tax filing process.

However, side hustlers must be proactive in tracking their income and managing their taxes, especially if they exceed the £1,000 threshold. With careful planning and the right support, you can take full advantage of the tax returns allowance and grow your side hustle with confidence.

For professional advice and support, Husein Accountants is here to guide you through the process and help you make the most of your side hustle’s financial potential. Reach out today to learn more about how we can assist you with your tax filings and help your side hustle thrive.

FAQs

The tax-free trading allowance allows individuals to earn up to £1,000 from their side hustle or self-employment without paying tax on it. If your earnings fall below this threshold, you are not required to report the income on your tax return, nor do you need to pay tax on it. This allowance is designed to support small-scale earners and encourage entrepreneurship.

No, if your income from your side hustle is £1,000 or less in a tax year, you do not need to pay tax on that amount, nor do you need to include it in your self-assessment tax return. The tax returns allowance ensures that income below this threshold is exempt from taxation.

If your income exceeds £1,000, you must report it on your self-assessment tax return. However, the tax returns allowance will still reduce your taxable income by £1,000, meaning you’ll only pay tax on the earnings above this threshold. It's important to keep accurate records of your earnings and expenses to ensure you’re meeting tax requirements.

Yes, even if you are utilizing the tax returns allowance, you can still claim eligible business expenses that reduce your taxable income. If your earnings exceed £1,000, you can deduct any allowable business expenses from your income, which can lower the amount of tax you owe. These expenses can include things like office supplies, equipment, and travel costs.

Yes, the tax returns allowance is the same for all individuals who earn income from trading or self-employment. However, it’s important to note that the allowance applies only to income from side hustles or businesses and not to other types of income, like wages from employment or rental income. You can also claim other tax reliefs or allowances, such as the personal allowance, which may further reduce your overall tax liability.