When it comes to making money online and having to declare additional income, many people are confused or put off by the process, meaning that they never start that side hustle or home based work. You might be worried about tax avoidance, and if so, what needs to be declared. In this post I am going to share what needs to be declared and how to declare additional income to HMRC in the UK.
Knowing how much tax you have to pay is vital to budgeting, especially if you have to budget with an irregular income.
When do you need to declare additional income to HMRC?
Many people are put off home based work or side hustles because of needing to declare extra income to HMRC, but you might not even need to declare extra income.
If you have started a home based business, home based work or a side hustle you can earn up to £1,000 per tax year without declaring your extra income.
This means that you don't need to register or file a self assessment.
The caveat here is that you also don't pay tax on some side hustles and home based business like matched betting income or on the first £7,500 you make with the Government's Rent A Room scheme.
The £1,000 per year is gross, meaning that it is what you earn before you pay any expenses out.
If you earn £1,100 and your expenses have been £1,000 then you still need to register and complete a self assessment.
The tax year runs 6th April – 5th April, so if you earn £500 in six months you know that you most likely don't need to register, however if you earn £500 in your first month then you can safely assume you will quickly reach that threshold and you will need to register.
How to register to declare additional income
Once you have established that you do need to declare additional income to HMRC it is time to get registered.
You do have a little bit of leeway – you need to register by 5th October in your business's second tax year.
All you need to do is visit the Gov website and register for self assessment.
If you are registering for the first time you need to allow at least 10 working days to receive all the information you need, which is sent in the post.
How to tell HMRC how much you have earned
Once you have registered for self assessment, HMRC will remind you to complete a tax return.
The absolute latest you can complete this is 31st January the following year, and you will need to pay your tax then too, often with a payment on account (explained below).
It is a good practice to complete it as soon as the tax year has ended as you can, thus allowing you time to ensure you have enough money to cover your tax bill in January.
You do not need to pay your taxes as soon as you have submitted your return.
Payment on account
Unless your last Self Assessment tax bill with less than £1,000 OR you have already paid more than 80% of the tax you owe (perhaps from your tax code) then you will also need to make payments on account.
A payment on account is an advance payment towards your tax bill and your National Insurance.
The payment is half of your previous year's tax bill, usually due by midnight on 31st January and 31st July.
Because of the COVID-19 pandemic, if you were due to make a second payment on account by 31 July 2020 then you do not need to pay this until 31 January 2021.
If you are working on a home based business or side hustle then you might be facing some business related expenses that you can declare.
This means that HMRC take these costs into account when working out how much tax you can pay.
There are lots of things you can declare as a business expense, here are some ideas:
- Travel (even to and from the Post Office if you are a reseller)
- Postage costs
- e-courses or books to help you grow your business
- Subscriptions such as blog hosting, editing software, accounting programs and more.
- Equipment e.g. a camera
- Expenses for working from home (read more about Simplified Expenses)
And so much more!
If you are a blogger then here are some items you can expense.
Keeping track of your accounts
We all work in different ways, but in order to help you to declare additional income you should find a way to track your income and expenses that works for you. You could use a spreadsheet or use accountancy software like Xero.
We use Xero for our business and it has really helped me to keep our accounts up to date. It syncs with my multiple business bank accounts, helps me to see overdue invoices at a glance and keeps our cashflow going.
Estimating and paying tax
You will need to pay your owed taxes to HMRC at least once a year (although you can opt to change your tax code and have your taxes come out of your PAYE earnings if you have another job) so it is a good idea to get into the practice of putting money aside every month from your additional income.
You could also use a self employed tax calculator to estimate how much money you need to pay in taxes.
Your tax should be paid by 31st January at the latest or you may incur fines.
Do I need an accountant to declare additional income to HMRC?
If you are just working on a sole trader basis then you do not need to have an accountant in order to declare your additional income to HMRC.
As your business grows you might decide to invest in an accountant.