HMRC’s latest response to the digital economy
In response to the increasing number of people earning untaxed income through digital platforms, HMRC has implemented a new crackdown that began on 1 January 2024. From this date, major platforms are legally required to gather and report data on user income. This new regulation is aimed at improving transparency and reducing tax evasion.
To support this initiative, HMRC is investing over £36 million and deploying 24 full-time enforcement officers to oversee the project. These specialists will analyse the information provided by platforms to ensure that any taxable earnings are properly declared. The measure is a clear signal that HMRC is taking tax compliance for digital income seriously.
People who are already compliant and report their additional income correctly will not be affected. However, those who have been unaware of their tax obligations or have chosen to ignore them may soon face investigations.
When does side hustle income become taxable?
To reduce the administrative burden of minor earnings, the UK government allows individuals to earn up to £1,000 inside hustle income annually without paying tax or needing to report it. This threshold, known as the Trading Allowance, applies to gross income before expenses.
If your total earnings from side hustles exceed £1,000 in a tax year, then you must report this income to HMRC. The threshold applies to total earnings across all activities. For instance, if someone earns £600 from eBay and £500 from Fiverr, they will need to declare the full £1,100 as it surpasses the allowance.
Similarly, if you rent out property through platforms such as Airbnb, you are allowed to earn up to £1,000 in gross rental income each tax year under the Property Allowance. Any income above this level must also be reported and may be subject to tax.
Registering as a sole trader
Once your side hustle income exceeds the £1,000 threshold, registering as a sole trader is the most straightforward way to become tax compliant. A sole trader is a self-employed person who owns and operates their business independently. This model is suitable for those involved in small-scale sales, freelance work, or gig-based services.
To register, you must sign up for the Self Assessment system through the GOV.UK portal. The deadline to register is 5 October following the end of the tax year in which you began trading. Missing this deadline can result in financial penalties. For example, if you started earning side income in August 2024, you must register by 5 October 2025.
Once registered, you are obligated to submit a Self Assessment tax return each year. This includes the main SA100 form and the SA103 form, which is specifically used to report self-employed income.
Filing your Self Assessment tax return
The Self Assessment system requires you to report all taxable income for the year, along with any allowable expenses you wish to claim. If you earn money from more than one source, such as employment and self-employment, you’ll need to declare both. Additional forms may be necessary for income from property, savings, or dividends.
The online filing deadline for the Self Assessment return is 31 January following the end of the relevant tax year. For the 2023 to 2024 tax year, this means you must file by 31 January 2025. Filing late triggers an automatic £100 penalty, with further fines depending on how long the delay continues.
Understanding how your side income is taxed
The amount of tax you owe on side hustle income depends on your net profit, which is your total income minus allowable expenses. Once your Trading Allowance and Personal Allowance have been applied, HMRC calculates your tax liability.
The Personal Allowance is the amount of income you can earn without paying any Income Tax. For the 2023 to 2024 tax year, this is set at £12,570. However, it is reduced by £1 for every £2 earned above £100,000 and disappears entirely once your income reaches £125,140.
Depending on your total taxable income, your side hustle may be taxed at one or more of the following rates:
- 20 percent on income between £12,571 and £50,270
- 40 percent on income from £50,271 to £125,140
- 45 percent on income over £125,140
If you live in Scotland, be aware that income tax rates and bands are slightly different from the rest of the UK.
Do you have to pay National Insurance on side income?
In addition to Income Tax, you may also have to pay National Insurance Contributions on your side to hustle profits. Even if you already contribute through your main job, self-employed earnings are assessed separately.
For the 2023 to 2024 tax year:
- Class 2 contributions are £3.45 per week, due if your profits exceed £12,570
- Class 4 contributions are 9 percent on profits up to £50,270, and 2 percent on profits above this
Significant changes will be introduced from 6 April 2024:
- Class 2 National Insurance will be abolished
- Class 4 rates will be reduced to 8 percent on profits between £12,571 and £50,270
These changes aim to simplify the system and reduce the burden on the self-employed. On average, they are expected to save around £350 per year for those earning £28,200.
Navigating the tax rules around side hustle income may initially seem complex, but understanding the key thresholds and processes is essential. With the new HMRC measures in place, it is more important than ever for anyone earning from platforms like eBay, Airbnb, Fiverr, and others to ensure they are compliant.
What are allowable business expenses?
Allowable expenses are the legitimate business costs you incur while running your side hustle. These expenses can be deducted from your income, reducing the amount of profit on which you pay tax. However, if you choose to use the £1,000 Trading Allowance, you cannot claim additional expenses.
If your costs exceed the allowance or if you want to deduct actual expenses instead, you can list out each one in your Self Assessment return. To be deductible, the expense must be incurred wholly and exclusively for business purposes. If you use something for both business and personal reasons, such as a mobile phone or internet, you can only claim the business proportion.
Types of expenses you can claim
There is a wide range of costs that count as allowable expenses. These may include:
- Rent, utilities, and council tax (if working from home, you can only claim a proportion)
- Office supplies like paper, ink, pens, and folders
- Postage, courier charges, and packaging materials
- Advertising and marketing, including website hosting and social media ads
- Subscriptions to trade journals, software, or industry tools
- Training courses relevant to your business
- Professional association memberships
- Insurance for your business activities
- Accountant or legal fees related to your business
- Equipment and tools needed to carry out your work
- Uniforms or protective clothing that display your business brand or are required for safety
- Business travel costs including mileage, fuel, public transport fares, and parking (not commuting)
If calculating these amounts seems complicated, you can opt for simplified expense methods for working from home and business vehicle use.
Simplified expense options
HMRC allows sole traders to claim flat-rate expenses instead of calculating actual costs. This can be especially helpful if you work from home or use a vehicle for your business.
For working from home, you can claim a monthly flat rate based on the number of hours worked per month. For example:
- 25 to 50 hours a month: £10
- 51 to 100 hours a month: £18
- 101 or more hours a month: £26
For vehicle use, instead of tracking all fuel, maintenance, and insurance costs, you can claim a mileage allowance:
- 45p per mile for the first 10,000 miles
- 25p per mile after that
These simplified methods save time and effort while still providing tax relief for genuine business use.
Keeping accurate business records
To complete your Self Assessment return accurately, you need to keep proper records of your income and expenses. Good record-keeping not only ensures compliance with HMRC rules but also gives you a clear view of your business finances.
You should keep:
- Invoices or receipts for all income received
- Receipts, bills, or statements for expenses
- Bank statements and payment records
- Mileage logs for any vehicle claims
Digital accounting tools or apps can simplify this process and reduce the chance of error. Cloud-based platforms also make it easier to organise receipts and generate tax reports.
How long should you keep your records?
HMRC requires you to retain your records for at least five years after the 31 January deadline following the end of the tax year. For example, records for the 2023 to 2024 tax year (ending 5 April 2024) must be kept until at least 31 January 2030.
If HMRC decides to investigate your tax return, these records will be essential. Incomplete or inaccurate records can lead to penalties, so it is important to maintain them diligently.
Common mistakes to avoid
When managing expenses and record-keeping, there are several pitfalls to watch out for:
- Mixing personal and business expenses without clear separation
- Claiming full expenses for items used partly for personal reasons
- Forgetting to log mileage or travel details
- Not keeping receipts or documentation for claims
- Waiting until the end of the year to start organising records
Developing a habit of recording expenses and income as they occur can save you time and reduce stress when it’s time to file your return.
Using technology to stay organised
Many small business owners and freelancers find it helpful to use accounting software. These platforms often integrate with bank accounts, making it easier to track spending, issue invoices, and prepare for tax time.
Some apps are tailored for sole traders and side hustlers, offering expense categorisation, mileage tracking, and automated reminders for deadlines. These tools not only streamline record-keeping but also provide helpful insights into your business performance.
How HMRC identifies undeclared income
With the new reporting requirements now in place, HMRC will have access to income data provided by digital platforms. This includes information about sellers, landlords, service providers, and drivers who earn through popular platforms. HMRC can cross-check this data with Self Assessment tax returns to identify discrepancies and potential non-compliance.
Digital reporting will make it easier for HMRC to flag users who exceed the £1,000 income thresholds but fail to register or report their earnings. This level of transparency is a major shift, making it harder for individuals to hide income earned from side hustles.
In addition to platform data, HMRC also uses sophisticated algorithms, financial records, bank information, and even social media activity to detect undeclared income. Once a potential issue is identified, it may lead to a formal investigation.
What happens during a tax investigation
If HMRC suspects that you have not reported your income correctly, they may open an inquiry into your tax affairs. This process can vary in length and complexity depending on the nature of the case. Initially, you may receive a letter requesting more information or clarification about your income or expenses.
If the inquiry progresses, HMRC may request copies of your records, receipts, invoices, and bank statements. They might also ask about how your business operates and how you calculate income and expenses. In some cases, they may interview you or visit your home or business premises. If errors are found, HMRC will recalculate your tax bill and apply interest on the unpaid amount. Penalties can also be added, especially if the mistake is deemed careless or deliberate.
Penalties for failing to report income
Penalties for non-compliance can be significant and are based on how the error occurred:
- If HMRC believes the error was careless, penalties can range from 0 to 30 percent of the unpaid tax
- If the error was deliberate but not concealed, penalties can be 20 to 70 percent
- If the error was deliberate and concealed, penalties can range from 30 to 100 percent
In addition to penalties, you’ll also be required to pay the unpaid tax and any interest that has accumulated. Repeated non-compliance or refusal to cooperate with HMRC may result in more severe actions, including prosecution in serious cases.
Steps to avoid penalties and remain compliant
The best way to stay on the right side of tax laws is to understand your obligations and keep accurate, up-to-date records. Here are key steps to help ensure compliance:
- Register for Self Assessment as soon as your side income exceeds £1,000
- Keep detailed records of income and expenses
- File your tax return on time and accurately
- Respond promptly to any communication from HMRC
- Seek advice if you’re unsure about what to report
Being proactive is essential. If you realise you’ve made a mistake or failed to declare income, it’s better to inform HMRC voluntarily. Doing so may result in reduced penalties or even the waiving of fines.
Benefits of voluntary disclosure
If you come forward before HMRC contacts you, it’s considered a voluntary disclosure. In most cases, this leads to significantly reduced penalties. It also demonstrates cooperation and honesty, which can work in your favour.
To make a voluntary disclosure, you’ll need to inform HMRC of your underreported income, calculate the tax due, and agree to pay it along with any interest. There are online forms and guidance available to help you through the process.
Staying organised throughout the year
Rather than waiting until the tax deadline, keeping your financial records organised year-round will help reduce stress and ensure you remain compliant. Consider setting a monthly reminder to record income and expenses, store receipts, and update mileage logs.
Using spreadsheets or accounting software makes this process more efficient. Having a clear system for categorising expenses and tracking sales can help you identify tax-saving opportunities and avoid costly mistakes.
Getting professional help
If you find tax rules complex or are unsure how to calculate your tax liability, it might be worth consulting a tax advisor or accountant. They can help ensure that your tax return is accurate, that you claim all relevant deductions, and that you avoid errors that might lead to an investigation.
Working with a professional can be especially useful if your income is variable, comes from multiple sources, or involves cross-border transactions. Some advisors specialise in helping side hustlers, gig workers, and online sellers, and understand the unique challenges faced by individuals in this space.
Preparing for the future of digital taxation
With digitalisation transforming the way HMRC collects and analyses tax data, the landscape for reporting side hustle income will continue to evolve. In the coming years, the government is expected to roll out more tools and updates under the Making Tax Digital initiative, which may eventually become mandatory for all sole traders and landlords.
Staying informed about upcoming changes will be crucial. Keeping accurate digital records now will put you in a strong position as new requirements emerge. The side hustle economy offers flexibility, autonomy, and the opportunity to earn extra income. However, it also comes with tax responsibilities that must be taken seriously. With HMRC’s new powers and tools to track digital income, being transparent and compliant is more important than ever.
Understanding how different side hustles are taxed
Different side hustle models come with distinct tax considerations. Whether you’re freelancing, selling goods online, renting property, or driving for a ride-share service, understanding how each category works under UK tax law is essential.
For instance, freelancers offering services through platforms like Fiverr or Upwork are treated as self-employed service providers. Their income is subject to Income Tax and National Insurance, minus any allowable business expenses. Conversely, if you sell handmade or second-hand items on Etsy or eBay, your activities might fall under trading income, which also carries tax obligations once you exceed the £1,000 Trading Allowance.
If you rent your property or a room on Airbnb, your income may fall under the Property Allowance. However, it could also fall under the Rent-a-Room Scheme if you live in the property and rent out a furnished room. In that case, you can earn up to £7,500 tax-free annually.
Food delivery drivers working with Deliveroo or Uber Eats often incur vehicle-related expenses. They must track mileage, fuel, maintenance, and phone usage. These drivers also need to ensure they carry the right type of insurance and keep a record of all shifts worked to support their tax returns.
Case study: Selling handmade products online
Emma, a graphic designer by day, sells personalized gifts on Etsy during evenings and weekends. Over a year, she earns £6,500 from this venture. After deducting material costs, postage, packaging, advertising, and platform fees, her profit is £3,900.
Since her earnings exceed the £1,000 Trading Allowance, she registers as a sole trader and files a Self Assessment tax return. Emma also keeps detailed records using accounting software. She deducts the cost of her laptop, printer, and design software proportionately, as they are used partly for business.
Because her total income (including her full-time job) is £35,000, her Etsy profits fall within the basic tax rate band. Emma pays 20% Income Tax on her profit and Class 2 and 4 National Insurance contributions on her self-employed earnings.
Case study: Airbnb host using property allowance
James owns a two-bedroom flat and rents out the second bedroom occasionally on Airbnb. In a year, he earns £950. Since this is below the £1,000 Property Allowance threshold, he doesn’t need to register with HMRC or report this income.
The next year, his Airbnb income increased to £2,100. James now has two options: claim the £1,000 Property Allowance and pay tax on the remaining £1,100, or deduct actual expenses like cleaning, utilities, insurance, and maintenance from his gross income.
He compares both and decides claiming actual expenses yields better tax savings. He registers for Self Assessment and starts keeping records of his hosting calendar, receipts, and bills. His proactive approach helps avoid mistakes and simplifies his tax reporting.
Preparing for side hustle taxes from the start
Many side hustlers don’t think about taxes until after their first year of earnings, often resulting in stress, penalties, or unexpected bills. Taking a proactive approach from day one reduces risk and helps you make the most of tax allowances.
Here are some smart practices to implement early:
Separate your finances
Open a separate bank account for your side hustle income and expenses. This not only makes bookkeeping simpler but also helps you avoid mixing personal and business transactions.
Use basic accounting tools
Even if you don’t invest in premium software, using free or low-cost apps can help track sales, expenses, and invoices. Setting aside 20-30 minutes each week to update your records makes year-end tax filing much easier.
Set aside money for taxes
A good rule of thumb is to set aside 25-30% of your profits for tax. This helps ensure you’re not caught short when your tax bill arrives. You can place this amount into a savings account and make payments to HMRC ahead of deadlines if you wish.
Understand your reporting obligations
Read up on the Self Assessment process, allowable expenses, and National Insurance rules. The HMRC website offers detailed guides, and many free webinars and courses are available for new sole traders.
Industry-specific tax tips for side hustlers
Depending on your side hustle, you may encounter specific tax issues. Here are a few industry-focused insights:
Freelancers and creatives
Writers, designers, photographers, and content creators often have irregular income. Track every invoice and keep contracts or email agreements as supporting documentation. Subscriptions to editing software, creative platforms, and stock libraries are usually deductible.
Delivery and transport drivers
Track mileage and fuel carefully. Maintenance, insurance, and car washing are often deductible. If you use your vehicle for both business and personal purposes, calculate the proportion related to business accurately.
Online resellers
When selling items online, differentiate between selling used personal belongings (which may not be taxable) and buying items for resale (which is considered trading). Keep invoices for stock purchases, packaging costs, platform fees, and promotional expenses.
Tutors and coaches
Self-employed tutors should keep records of lesson schedules, bookings, and cancellations. Materials, printing costs, and online course subscriptions may qualify as allowable expenses.
What happens if you don’t comply
If you don’t register, report, or pay taxes on your side hustle income, HMRC may eventually find out. The consequences can be serious, especially under the new reporting system.
You could face:
- Backdated tax bills
- Interest on unpaid tax
- Penalties based on severity (careless, deliberate, or concealed)
- A damaged financial record
- Legal action in serious cases
HMRC’s approach often depends on your attitude during an investigation. Those who cooperate and show genuine misunderstanding usually face smaller penalties. Those who attempt to conceal or deny income tend to receive harsher treatment.
Why proactive compliance makes sense
While it may seem daunting, getting your tax affairs in order is empowering. It protects you from future issues and gives you peace of mind. Plus, understanding your business finances often leads to better decisions, higher profitability, and long-term success.
Here are the key benefits:
- Avoid penalties and legal consequences
- Gain financial clarity and confidence
- Maximise tax efficiency through allowable expenses
- Build a solid foundation for scaling your side hustle
Support available for side hustlers
You don’t have to figure it all out alone. There are many resources available to help new and experienced side hustle earners manage taxes effectively:
- HMRC’s Self Employment Helpline
- Webinars and online tutorials
- Free workshops by local enterprise centres
- Online forums and support groups for freelancers
- Affordable online accounting tools
- Chartered accountants who offer low-cost packages for sole traders
Many side hustlers also benefit from connecting with others in the same space. Social media groups, business communities, and networking events offer advice and motivation for handling both creative and financial challenges.
Conclusion
As the digital economy continues to expand, more individuals across the UK are turning to side hustles to boost their income, gain flexibility, or explore entrepreneurial passions. While this shift has opened up exciting new opportunities, it also brings significant tax responsibilities that can no longer be ignored. HMRC’s decision to require platforms like eBay, Etsy, Airbnb, Uber, and Fiverr to report users’ income marks a turning point in how side hustle earnings are tracked and taxed.
The introduction of mandatory reporting from January 2024 is not just a bureaucratic shift—it signals a stronger enforcement culture aimed at ensuring everyone contributes their fair share. With millions being invested in compliance measures and dedicated teams now monitoring undeclared income, HMRC is clearly prioritising transparency and accountability in the digital income space.
For side hustle earners, the message is clear: if your income exceeds the £1,000 trading or property allowance, you need to register, report it, and pay the appropriate tax. Failing to do so could result in penalties, backdated tax bills, and even formal investigations. But tax compliance need not be daunting. With a solid understanding of allowable expenses, accurate record-keeping, and the use of digital tools or professional support, you can ensure your side hustle is both profitable and fully above board.
Beyond compliance, managing your tax obligations properly offers wider benefits. It can help you track growth, improve budgeting, and give you confidence as you scale or transition into full-time self-employment. With evolving policies like the abolition of Class 2 National Insurance and reduced Class 4 rates from April 2024, the system is gradually becoming more streamlined for self-employed earners.
In this new landscape, awareness, organisation, and proactivity are your greatest allies. By embracing your role not just as a side hustler but as a responsible business owner—no matter how small your operation may be—you position yourself for long-term success, free from the stress of unexpected tax trouble. Stay informed, stay compliant, and make your side hustle work for you in every sense.