Business Advice, Tax & Admin

When to Pay Tax on Your Side Business

Business Advice | 28 April 2023 | 1 year ago

Many people start a side hustle as a way to make a bit of extra cash, but you may be wondering “do I have to pay tax on my side business?” and the answer is yes, but maybe not when you first start out. There are a lot of rules surrounding paying tax on your side business in the UK, which we have explained below.

Starting a side hustle is by no means a new idea, but it is something that a growing number of people are doing. This could be as a way to make extra money in light of the continuing cost of living crisis, or it might be because you dream of becoming your own boss. You might even start a side business because you want to follow your passion or hobby, and turn it into a stream of income that you enjoy. Whatever the reason, a key part of having a side business is knowing what tax you need to pay and how much.

If you are running a side business, you will be required to pay tax on any profits you make. The tax you will be required to pay will depend on several factors, including the structure of your business and the amount of money that you make. However, there is a lower limit to this, and you only need to pay tax on your side business once you are earning over a certain amount. This is why a lot of people don’t pay tax when they first start out, but will do further down the line. It’s important to stay on top of your tax obligations to ensure that you are paying what you need to pay, when you need to pay it.

When Do I Start Paying Tax on My Side Business?

If you make a profit of less than £1,000 then you don’t need to register your business, and this also means that you don’t need to complete a self assessment tax return and you won’t need to pay any tax on the money that you have made. This is often the case for a lot of people when they first launch a side business, as it can take a while for customers and clients to build up. Once you cross this £1,000 threshold, you will need to register with HMRC and things change.

You won’t start paying tax on your side business until you earn over £12,570. This is the personal allowance that everyone in the UK is entitled to in 2023 and it’s a figure that changes slightly each year. This is the amount that you are allowed to make without paying any tax on your earnings. You will need to complete a tax return and submit it to HMRC, but your tax obligation will be zero. Once your side business starts making a profit of more than the personal allowance, you need to start paying tax.

You can choose to register as a sole trader or a limited liability company (LLC) and there are advantages to both. As a sole trader, you need to submit an annual self assessment tax return, but you don’t need to file company accounts to HMRC. You also benefit from having to keep fewer records. This is the route that a lot of people take when they start a side business, especially if you are working for yourself and have very little expenses, outgoings and overheads.

If you register as an LLC, you need to keep a lot more records and you will need to pay Corporation Tax. However, you could find being an LLC to be more tax efficient, as Corporation Tax is less than Income Tax. Regardless of how you set your side business up, you should keep records from the beginning of profits and expenses. This will help you to submit your tax returns accurately.

How to Register Your Side Business for Tax

Once your side business is up and running, you will need to register it with HMRC, and you need to do this by the 5th October in your business’ second tax year. Once you have registered, you will be able to complete tax returns and pay tax on the income that you make. If you do not register your business, you won’t be able to submit a tax return and this could cause problems further down the line in regards to unpaid, owed tax.

How Much Tax to Pay on Your Side Business

The amount of tax you need to pay on your side business will vary hugely, depending on how much you have earned and what your expenses were. Your taxable profit is calculated after up to £10,000 worth of expenses have been deducted. Allowable expenses are costs that go towards running your business, such as raw materials, stock, office costs, phone bills, heating, business rates, uniforms, marketing and advertising. Once these expenses have been deducted, your remaining taxable profit can be calculated and this is the amount that you pay tax on.

Various tax rates exist and the amount you pay on your side business will depend on your profit. The basic rate of tax is 20% and this is payable on anything over the £12,570 personal allowance up to £50,270. The next rate of tax is 40%, which you will pay on profits between £50,270 and £150,000. Above that, there is an additional rate of tax at 45%. These figures are for the 2023 – 2024 tax year, and are set to change going forward.

Luckily, you don’t need to work out how much tax to pay yourself, and this will be calculated by HMRC as part of your self assessment tax return.

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