HMRC and the Focus on Side Hustle Earnings
The HMRC has increased its focus on side hustlers, especially as more individuals earn through digital platforms. It is now investing heavily to identify those who are not declaring income. Many online platforms such as Airbnb, eBay, TikTok, Vinted, YouTube, Uber, and others may now be required to share users’ income data with tax authorities. This transparency aims to ensure that everyone contributes their fair share of tax.
However, not all side hustle income comes from the internet. Traditional income streams like selling handmade products, tutoring, dog walking, freelance services, and event gigs also fall under taxable income when thresholds are crossed. Regardless of the source, individuals must stay on top of their finances to ensure they are meeting their legal obligations.
What Counts as a Side Hustle for Tax Purposes?
A side hustle refers to any self-employed activity that generates income outside of regular employment. It could be one-time freelance work, a recurring service like piano lessons, or consistent sales of physical or digital products. HMRC classifies this as self-employment, and all income must be recorded accurately.
There’s a key difference between hobby income and a business. If you’re regularly making sales or providing services with the aim of making a profit, HMRC may consider your activity a business, meaning you must report your earnings and potentially pay tax.
The Legal Need for Financial Records
As a self-employed individual or sole trader, you’re required to maintain accurate records of all income and business-related expenses. These records support your Self Assessment tax return and act as evidence in case HMRC asks for verification.
Proper records should include:
- Invoices or receipts for sales or services rendered
- Proof of expenses (receipts, bills, statements)
- Dates of income received and expenses incurred
- Records of platform commissions, packaging costs, and shipping fees
Failing to maintain clear and accurate records could lead to fines, interest on unpaid taxes, and a requirement to pay backdated taxes. Deliberately avoiding taxes is a more serious offence, often resulting in penalties or prosecution.
Choosing the Right System to Record Income and Expenses
There are two primary approaches for managing your side hustle finances: spreadsheets and bookkeeping software.
Using Spreadsheets
For those confident with formulas and data entry, spreadsheets are a flexible and free way to manage finances. Tools like Google Sheets or Excel allow you to manually input income and expenses, create formulas to calculate totals and profits, and organise different income streams into separate sheets.
The downside is that spreadsheets require regular attention and discipline. Mistakes can happen easily, and it’s not as secure or intuitive as using specialised software. Nevertheless, for side hustlers with very few transactions or those just starting out, spreadsheets may be sufficient.
Using Bookkeeping Software
Bookkeeping software offers more robust features that simplify financial management. These platforms typically allow you to:
- Connect your business bank account and automatically import transactions
- Categorise income and expenses with minimal effort
- Generate profit and loss reports
- Access data on any device
- Share access with an accountant
- Link to Self Assessment submission tools
This type of software generally costs about £10 per month. This small expense can be claimed as a business cost, reducing your taxable income. For many side hustlers, the peace of mind and convenience provided by automated tools far outweigh the monthly fee.
Leveraging Online Platform Dashboards
If you earn through digital platforms, many provide dashboards that make it easier to track sales and deductions. For instance, eBay and Etsy offer insights into gross sales, platform fees, taxes collected, and postage paid. YouTube and TikTok creator programs also provide downloadable earnings reports. Airbnb hosts can access breakdowns of bookings, service fees, and cleaning charges.
This information is incredibly valuable when updating your financial records. You should transfer this data regularly into your spreadsheet or bookkeeping software to avoid missing important transactions. Expenses like platform commissions, advertising costs, and delivery services can be deducted from your gross income to reduce your tax liability.
What Expenses Can You Claim?
Business expenses are costs you incur wholly and exclusively for running your side hustle. Claiming them can significantly reduce your tax bill. Some common allowable expenses include:
- Postage and packaging costs
- Advertising and marketing fees
- Equipment and tools used for the business
- Office supplies and stationery
- Website hosting or domain fees
- Mobile phone and internet (proportional use)
- Subscriptions related to your business (e.g., design software)
- Business travel and vehicle mileage
- Bank charges on business accounts
- Accounting or bookkeeping software fees
It’s important to keep receipts or digital records of all expenses you plan to claim. If HMRC asks for evidence, you must be able to provide it.
The Trading Allowance and What It Means
The UK government offers a trading allowance that exempts the first £1,000 of your gross trading income from taxation. If your income from self-employment is under this threshold, you don’t need to register for Self Assessment or pay tax. However, this exemption only applies if you are not claiming business expenses.
If your side hustle earns more than £1,000 a year or if you want to claim tax-deductible expenses, you must register for Self Assessment. This decision typically depends on how much you earn and whether your expenses are significant enough to reduce your taxable income by more than £1,000.
When and How to Register for Self Assessment
You need to register for Self Assessment if your gross self-employment income exceeds £1,000 during a tax year. The UK tax year runs from 6 April to the following 5 April. You must register by 5 October of your side hustle’s second tax year to avoid penalties.
The registration process involves:
- Creating a Government Gateway account
- Registering as a sole trader with HMRC
- Receiving your Unique Taxpayer Reference (UTR)
Once registered, you’ll be responsible for submitting an annual Self Assessment tax return, which outlines your total income, allowable expenses, and any tax owed.
Understanding the Self Assessment Forms
The main form is the SA100, which is your individual tax return. Side hustlers also need to fill in the SA103 supplementary page, which details self-employment income and expenses. The short version (SA103S) is for simpler businesses with lower income levels, while the full version (SA103F) is for more complex operations.
Each year, you must:
- Keep accurate records of all income and expenses
- Calculate your total profit (income minus expenses)
- Report this information on your Self Assessment tax return
After submission, HMRC will calculate your tax and National Insurance contributions. You’ll then receive a bill with the amount owed and the due date.
Income Tax and National Insurance on Side Hustle Profits
How much tax you pay depends on your total taxable income, which includes your side hustle and other earnings (like a salary).
For the 2024/25 tax year in England, Wales, and Northern Ireland:
- The first £12,570 of total income is tax-free (your personal allowance)
- 20% tax applies to income between £12,571 and £50,270
- 40% tax applies to income between £50,271 and £125,140
- 45% tax applies to income above £125,140
In Scotland, tax bands and rates differ slightly.
If your self-employment profit exceeds the Class 4 National Insurance threshold, you’ll also owe NI contributions on your profit. These apply in addition to income tax and must be paid by the same deadline.
Keeping a Regular Financial Routine
One of the best ways to manage side hustle finances is to make it a habit. Regular updates to your records—whether daily, weekly, or monthly—will make tax season far less stressful. The more frequently you log income and expenses, the less likely you are to miss something or fall behind.
Staying on top of your finances also gives you insight into your business performance. You can track trends, identify high-profit months, review expense patterns, and make more informed business decisions.
Choosing the Right Accounting Method for Your Side Hustle
Before you begin recording your income and expenses, it’s important to decide which accounting method best suits your side hustle. There are two primary methods used in the UK for small businesses and sole traders: cash basis accounting and traditional (accrual) accounting.
Cash basis accounting is simpler and ideal for many side hustlers. You only record income when you receive it and expenses when you pay them. This method gives a clear picture of your actual cash flow and is suitable if your turnover is under £150,000. It simplifies your record keeping and helps avoid paying tax on money you haven’t yet received.
Traditional accounting, on the other hand, involves recording income and expenses when they are an invoice or incurred, regardless of when money changes hands. This method provides a more accurate long-term view of your financial performance but requires more detailed tracking and is often used by businesses with more complex operations. Understanding the differences and selecting the method that fits your business structure and goals is a foundational step to organising your finances effectively.
Setting Up a System That Works for You
To maintain reliable financial records, consistency is key. Whether you’re a casual seller or operate a growing side business, having a dependable system in place helps prevent confusion and reduces stress when it’s time to file your tax return.
Start by creating categories for your income and expenses. This could include separate headings for each type of product or service you sell, or different platforms you use. Similarly, break your expenses down into categories such as materials, postage, platform fees, marketing, software, travel, utilities, and subscriptions.
Establish a routine for updating your records. Allocate time weekly or bi-weekly to enter all relevant transactions. Sticking to a regular schedule keeps your data current, helps you avoid missing entries, and makes tax preparation more manageable. Use cloud storage or secure backup options to avoid losing important financial documents. Save digital receipts, invoices, and proof of expenses in labelled folders that correspond to your records. You’ll need these if HMRC requests evidence during a tax check.
Income Streams: How to Record Your Side Hustle Earnings
Each side hustle has its unique income patterns. Sellers on eBay or Etsy might receive frequent small payments, while freelance service providers might issue fewer but larger invoices. Either way, it’s vital to record each transaction accurately.
Use a transaction log or spreadsheet that includes the following details:
- Date payment was received
- Source of income (client name or platform)
- Description of service or product
- Amount received
- Payment method
- Related fees or deductions (e.g. PayPal, Stripe, or platform fees)
If you’re using multiple platforms, it’s helpful to track income by source. This lets you see which channels are most profitable and may help inform business decisions or marketing efforts. Online marketplaces often provide downloadable monthly or quarterly reports detailing your sales, commissions, and fees. Save these regularly and incorporate them into your records to maintain an accurate overview of your earnings.
Tracking Expenses: What You Can and Can’t Claim
Every pound you spend on business-related costs can reduce your tax bill, provided those expenses are allowable under HMRC guidelines. Understanding what you can claim—and what you cannot—is essential to managing your taxable income.
Common allowable business expenses for side hustlers include:
- Stock or materials
- Packaging and postage
- Advertising and promotional costs
- Phone and internet bills (proportional to business use)
- Office supplies
- Travel and mileage (if business-related)
- Insurance
- Professional services (like accountants or legal advice)
- Subscriptions and software tools used for your business
You must keep evidence of each expense, such as receipts, invoices, or digital confirmation emails. If you claim for something that’s partly personal and partly business (like a phone bill), you can only deduct the business portion.
Be cautious about claiming expenses that could be seen as personal. HMRC is strict about ensuring only genuine business costs are deducted. Entertainment costs, for example, are generally not allowable.
Digital Tools to Help You Stay Organised
There are several user-friendly digital tools that can simplify the process of tracking income and expenses. These tools vary in cost and complexity, but even the most basic options provide valuable support for side hustlers managing their own accounts.
Spreadsheet applications like Google Sheets or Microsoft Excel are popular for their customisation and low cost. With basic templates, you can track your income, expenses, and calculate totals or profit margins.
Accounting software offers more automation and convenience. Features may include:
- Bank feed integration
- Automatic categorisation of expenses
- Invoice generation
- Real-time reporting and dashboards
- Cloud access from any device
These systems make your records easier to maintain and reduce the chances of missing vital tax deadlines. They also support compliance by storing data in formats accepted by HMRC’s Making Tax Digital programme.
Choose a tool based on your level of comfort with technology, the volume of your transactions, and your budget. Even small-scale side hustles can benefit from basic bookkeeping apps, especially when preparing for Self Assessment.
Separating Personal and Business Finances
Mixing your business and personal transactions is one of the most common—and costly—mistakes made by new side hustlers. It can lead to inaccurate record keeping and confusion when it’s time to calculate your taxable income.
To avoid this, consider opening a separate bank account for your side hustle. While this isn’t a legal requirement for sole traders, it offers numerous benefits:
- Easier transaction tracking
- Clearer audit trail
- Simplified bookkeeping
- Reduces risk of missed claims
If you prefer not to open a new account, use dedicated payment platforms or apps that you use solely for your business transactions. Keep your personal purchases out of these accounts to make reconciliation easier.
Keeping your finances separate also helps establish your business identity. This becomes increasingly important if you intend to scale up, apply for loans, or present your business to investors or collaborators.
Managing Invoices and Payment Tracking
For service-based side hustlers, issuing invoices is part of running the business. Invoices should include all necessary information:
- Your name and address
- Invoice number (for tracking)
- Date of issue
- Client name and address
- Description of goods or services
- Total amount
- Payment terms
Maintain a log of all issued invoices and update it regularly with payment statuses. Mark invoices as paid once money is received and follow up on any overdue amounts. Late payments can disrupt your cash flow, so prompt reminders are important.
Use invoice templates or apps to streamline this process. Many bookkeeping tools offer built-in invoicing features with automated reminders and tracking. Be consistent with your invoice formatting and numbering. This adds professionalism to your operation and improves organisation when reviewing past transactions.
Organising Your Paperwork and Digital Files
Efficient organisation of both digital and physical documents is essential. Not only does it help you find important information quickly, but it also ensures you’re ready in case of a tax audit.
Create a filing system that mirrors your accounting categories. For example, set up folders for income, expenses, receipts, bank statements, and invoices. Use subfolders for each month or quarter to keep everything structured.
When handling physical documents, scan and store them digitally to avoid loss or damage. Many apps allow you to scan receipts directly from your phone, label them, and upload them into cloud storage.
Use consistent file naming conventions so documents are easy to retrieve. Include the date, category, and a short description. For example: 2025-04-12_Stationery_Invoice1234.pdf. Always back up your files regularly—ideally in multiple locations. This might include a cloud storage platform, external hard drive, or secure USB device.
Preparing for Self Assessment
Accurate and up-to-date financial records throughout the year make completing your Self Assessment tax return far easier.
Self Assessment involves reporting your total income, expenses, and profit for the year to HMRC. You’ll fill out the main tax return (SA100) and the supplementary self-employment page (SA103). Your bookkeeping system should give you all the figures needed to complete these forms.
Before starting your return, review your records to ensure they’re complete. Reconcile your bank statements, double-check receipt entries, and summarise your income and expenses by category. The deadline for submitting your Self Assessment online is 31 January following the end of the tax year. Filing late can result in automatic penalties, even if you don’t owe tax.
HMRC may ask to see evidence of your reported income and expenses. This is why maintaining detailed records—and keeping them for at least five years after the submission deadline—is critical.
Budgeting for Tax Payments
Unlike employed individuals who have tax deducted automatically from their wages, side hustlers must set aside money throughout the year to pay their tax bill.
Calculate how much you should set aside based on your estimated profit. Many self-employed people aim to save 20–30% of their income to cover Income Tax and National Insurance. Open a dedicated savings account to avoid dipping into funds earmarked for tax.
In your first year of trading, your tax bill may also include a payment on account for the next tax year. This can increase your bill significantly, so planning ahead is essential. Review your income and expenses every quarter and adjust your tax savings accordingly. This helps you avoid unpleasant surprises and keeps your finances stable.
Keeping on Top of Deadlines and Legal Obligations
Running a side hustle means staying aware of your responsibilities as a self-employed person. In addition to filing a Self Assessment return, you may have other obligations depending on your income level and business type.
Register for Self Assessment by 5 October of your second trading year if your gross income exceeds £1,000. Missing this deadline can lead to penalties. The tax return deadline for online submissions is 31 January. Any tax owed must also be paid by this date. You may also need to make a second payment on account by 31 July.
Stay informed about any changes to tax rules that could affect you. For example, Making Tax Digital will require many sole traders to use approved digital software for record-keeping and submitting returns. Set reminders in your calendar or use accounting tools that send alerts for key dates. This helps ensure compliance and avoids unnecessary fines.
Efficient Side Hustle Management
After understanding the importance of keeping accurate financial records and complying with HMRC regulations, the next step in managing your side hustle successfully is adopting practical tools and methods for tracking income and expenses. We focus on how to optimize your record-keeping system, integrate technology for better performance, and enhance your tax efficiency through proper planning.
Why Your Financial System Matters
As your side hustle grows, your financial management needs to evolve. A system that may have worked for a casual, infrequent gig won’t be enough when you’re dealing with multiple income streams, varied expenses, and potential VAT or National Insurance obligations. Without a robust system, you risk:
- Missing tax deadlines
- Overlooking deductible expenses
- Misreporting income
- Losing track of growth trends
- Failing to plan for tax payments
Having the right tools and workflows in place reduces these risks significantly and gives you a clear understanding of your business performance.
Building a Simple but Powerful Financial Tracking System
Choosing Between Spreadsheets and Software
When starting, many side hustlers opt for spreadsheets. They’re free, easy to set up, and accessible via Google Sheets, Excel, or other tools. If you’re comfortable with formulas, filters, and tables, a spreadsheet might be sufficient—especially if you have only a handful of monthly transactions.
However, as transaction volume increases, so do errors and time commitments. This is where bookkeeping software becomes invaluable. Software can:
- Import transactions directly from your bank account
- Auto-categorise income and expenses
- Store receipts and supporting documents
- Generate reports instantly
- Keep your records compliant and secure
Some platforms also enable mobile tracking, so you can log income or expenses in real-time, no matter where you are.
Creating Categories for Your Records
Regardless of the system you use, the structure of your records matters. Begin by separating income and expenses, then break them down into clear categories. For example:
Income categories:
- Sales (products or services)
- Affiliate income
- Ad revenue (if you’re a creator)
- Platform payouts (like Uber, Airbnb, Fiverr)
Expense categories:
- Raw materials or inventory
- Travel and mileage
- Software and subscriptions
- Marketing and advertising
- Utilities (only the portion used for business)
- Home office costs
- Professional fees (legal, tax, etc.)
This categorisation not only helps at tax time but also allows you to analyse your profitability by area or product line.
How to Store Receipts and Records
You’re legally required to keep your financial records for at least five years after the 31 January submission deadline of the relevant tax year. For example, for the 2024–25 tax return due by 31 January 2026, you must keep records until at least 31 January 2031.
Digital receipts are accepted by HMRC, and most apps allow you to snap a photo and save it with your transaction. This method is secure, fast, and space-saving. Make sure you regularly back up digital files, or use cloud-based software that does this for you automatically.
Monitoring Your Cash Flow
Understanding the flow of cash in and out of your business is essential. Many side hustlers are profitable on paper but struggle because they run out of money when bills are due. Cash flow forecasting allows you to:
- Predict when you’ll be low on funds
- Time expenses or purchases wisely
- Prepare for tax payments
- Avoid relying on credit or loans unnecessarily
You can create a basic forecast by estimating future income and mapping out upcoming expenses. Most accounting platforms include a cash flow view or offer plugins to help automate this process.
Planning Ahead for Taxes
When to Set Aside Money
Because side hustle income doesn’t have tax deducted automatically like salaried employment, you’ll need to set aside money throughout the year to cover your eventual tax bill. A good starting point is to reserve 20–30% of your side hustle profits each month.
You can place this into a separate savings account to avoid accidentally spending it. As your earnings grow and your tax situation becomes more complex, you may want to speak to a professional to better estimate your liabilities.
Deadlines to Know
You must register for Self Assessment by 5 October following the end of your second tax year. The deadline to submit your online return is 31 January following the tax year in question. Payment is also due by 31 January.
If you owe more than £1,000 in tax, you may also need to make payments on account, which are advance payments towards the next year’s tax. These are due in two parts: by 31 January and 31 July.
Late filings or payments can result in penalties, which increase over time.
Optimising Your Side Hustle for Tax Efficiency
Understanding Allowable Expenses
Allowable expenses are costs you incur exclusively for business purposes. Claiming all legitimate expenses reduces your taxable profit and the amount of tax you owe. Examples include:
- Costs of goods sold
- Marketing and web hosting
- Domain registration
- Software subscriptions
- Travel (excluding commuting)
- Business insurance
- Phone bills (proportional for business use)
Make sure you record these accurately, with receipts or digital proof, and claim only what’s justified to avoid problems with HMRC.
Weighing Up the Trading Allowance vs Actual Expenses
If your gross income from self-employment is under £1,000 in a tax year, you don’t need to report it. But once you earn over £1,000, you must decide whether to claim the trading allowance or your actual expenses. You cannot do both.
- If your expenses are low, the trading allowance might be the better option.
- If you have substantial business costs, claiming actual expenses will reduce your taxable profit more effectively.
Always calculate both options and choose the more beneficial one. Your accounting software or a tax advisor can assist with this.
Keeping Personal and Business Finances Separate
One of the simplest ways to improve your financial clarity and efficiency is to open a separate bank account for your side hustle. This doesn’t need to be a formal business account unless you incorporate a company, but it should be dedicated to your freelance or gig income.
A separate account ensures:
- You don’t confuse personal spending with business activity
- Record-keeping is cleaner
- Reconciling income is faster
- Tax calculations are more accurate
Most online banks allow you to open secondary accounts quickly and with no fees. Some even offer automatic expense tracking features.
Exploring VAT and Other Tax Obligations
When Does VAT Apply?
You must register for VAT if your taxable turnover exceeds £90,000 in any 12-month rolling period (as of the 2024–25 tax year). Once registered, you’ll need to:
- Add VAT to your sales
- Submit quarterly VAT returns
- Keep digital VAT records
Many small side hustlers don’t hit the threshold but can choose to register voluntarily. This can be useful if your customers are mostly VAT-registered businesses, or you incur lots of VATable expenses.
Other Taxes That Might Apply
In addition to Income Tax, your side hustle might incur:
- Class 2 and Class 4 National Insurance
- Capital Gains Tax (if you sell assets like art, shares, or property)
- Business rates (if you operate from commercial premises)
If your hustle involves employing others or incorporating as a limited company, your obligations expand further. Seek professional advice if your business structure changes significantly.
Regularly Reviewing Your Business Performance
Numbers tell a story. Once you’re collecting accurate data, it’s time to review your side hustle’s performance. Useful metrics to track monthly or quarterly include:
- Revenue trends
- Profit margins
- Customer acquisition costs
- Average order value
- Expense growth
Use this information to make smarter business decisions: raise or lower prices, discontinue unprofitable services, or identify high-performing marketing channels. Reports generated by accounting tools make these insights easy to access and understand. They also help when seeking a business loan or working with a financial advisor.
The Value of Professional Support
Hiring an accountant might seem unnecessary if your side hustle is small, but expert support can save you time, reduce stress, and increase accuracy.
An accountant can:
- Help you choose the right legal structure
- Advise on deductible expenses
- Ensure compliance with HMRC
- Assist with Self Assessment or VAT returns
Even one-off consultations can clarify complex issues or help you plan effectively for growth.
Staying Compliant as You Scale
Your side hustle may grow into a substantial business. As your income increases, your responsibilities do too. Staying compliant means:
- Keeping up-to-date financial records
- Meeting all reporting deadlines
- Paying taxes correctly and on time
- Adhering to platform terms and legal obligations
Falling behind in any of these areas can create stress and financial penalties. But with good systems and regular attention, staying compliant becomes routine.
Getting Ready for Making Tax Digital
Making Tax Digital (MTD) is the UK government’s initiative to digitise the tax process. While MTD for VAT is already live for some, it’s expanding to include Income Tax Self Assessment in the coming years.
This means:
- Digital record-keeping will become mandatory
- Quarterly updates to HMRC will replace the single annual return
- Compatible software will be required
Preparing now by adopting digital tools and workflows will make the transition smoother. MTD aims to reduce errors and make the process more efficient.
Financial organisation is the cornerstone of a successful and stress-free side hustle. Whether you’re earning a few hundred pounds a month or building toward a full-time business, the systems and strategies outlined here will help you stay on top of your money, comply with tax laws, and make informed decisions as your side hustle evolves.
Conclusion
Running a side hustle in today’s digital and entrepreneurial age presents exciting opportunities. Whether you’re selling online, creating content, offering professional services, or engaging in more traditional work like tutoring or crafting, the potential for extra income—and even a full-time business—is real. But success isn’t just about passion, productivity, or profit. Behind every sustainable side hustle lies a solid foundation of financial management.
From understanding HMRC’s expectations to choosing the right tools and practices for tracking income and expenses, staying compliant with tax regulations is critical. The introduction of data-sharing between digital platforms and HMRC, the £1,000 trading allowance, and the Self Assessment system all underscore the importance of clear, accurate, and timely financial records.
Spreadsheets and bookkeeping software are powerful allies in managing your financial health. They not only help prevent costly mistakes but also give you visibility into how your side hustle is performing. Knowing your numbers—revenue, profit, tax owed—empowers you to make smarter decisions and grow with confidence.
As your venture evolves, what starts as a side project can become a meaningful source of income or even your primary livelihood. Whatever your goals, mastering the discipline of financial tracking and tax awareness ensures you’re prepared for what comes next.
Stay consistent, stay informed, and stay ahead. When your records are in order, your earnings protected, and your taxes paid properly, you can focus on what matters most—doing the work you love, on your own terms.