Started A Lockdown Side Hustle? Here’s The Money Advice You Need

Illustrated by Twisha Patni.
During the COVID-19 pandemic, millions of Brits have been turning to side hustles to complement their day job. In fact, 25% of the UK now claim to have a side hustle. These extra jobs don't need to be fully fledged second salary earners but they can be useful as an extra financial incentive, lead to personal development and can open doors to other industries without sacrificing your current job or a steady paycheque. Your side hustle can be anything from brand consultancy to photography to copywriting. It could be catering, doing deliveries or even selling vintage clothes.
However, a new study from Online Money Advisor has found that two-thirds of those earning additional income in the form of a side hustle could be committing tax fraud. The study of over 2,400 Brits showed that 67% of participants didn't know how to check if they were committing tax fraud and over a quarter were found to be guilty of doing so. The top five ways that people were accidentally dodging taxes were not reporting all income (34%), overestimating business expenses (25%), using cash or cryptocurrencies for business transactions (22%), failing to file tax returns (19%) and overvaluing charity donations (7%).
Pete Mugleston, money expert and MD at OnlineMoneyAdvisor, said: "With all the excitement surrounding starting your own side project at home, paying taxes can often be overlooked. Some people may think they don't need to register as a company because what they're doing may seem small, but the threshold for registration is lower than people realise." Even if your business is making handmade cards and you initially sell them to family and friends, if you end up selling thousands of pounds' worth across an entire year, then you should get yourself registered on HMRC, he says, adding: "The penalties for tax evasion can be bleak, including jail time and hefty fines."
Iona Bain, money expert and founder of the Young Money Blog, seconds that HMRC investigations can happen at any time. "HMRC has extensive powers to look into our financial affairs, and you have to keep records for six months," she tells Refinery29. "You could face a hefty penalty if it's found you didn't keep records, under-declared your income, or failed to file a return. It can be a very stressful experience that is well worth avoiding."
So if you have started a lockdown side hustle, what are the best ways to stay on the right side of the taxman?

Find an accountant

Your best bet is to find a certified or chartered accountant who can handle key functions such as bookkeeping and tax returns. They also cover essential areas such as financial reporting, compliance, payroll, tax efficiency and business planning. "If you have a complex and sophisticated side hustle operation, it may well be worth your while to consult an accountant because they will help you file your tax returns and stay on the right side of the law," says Iona. Of course, an accountant might not be an option for everyone financially but if you do have spare cash, the typical cost for an average UK accountant will be around £35 per hour for basic services, such as working on a return. More complex work such as tax planning can put you back £150 an hour or more.

Stick to a budget

Your tax affairs are a lot more straightforward if you are earning less than £1,000 a year in trading income because the government introduced a £1,000 trading allowance for anyone with a side hustle, which means you can earn that amount tax-free, meaning you don't have to declare it or file a self-assessment tax return. "The first step, however, is to keep on top of your budget and have good record-keeping," adds Iona, "so it helps if you can easily transfer money between different accounts you may have. You may also want to set money aside in a savings pot to pay your tax bill, using a feature now available in many online accounts such as those from Monzo and Starling."

Be aware of the risks

While you are probably under no obligation to inform your employer that you have a side hustle, provided you're not doing similar work for a competitor (make sure you check your contract though), there are a few issues to flag according to Iona. "If you are currently furloughed, you can't undertake other work during your contracted hours, though it doesn't stop you outside those hours," she says. "You have to be organised to make sure your side hustle doesn't materially interfere with your day job. And if it's going that well, it may be time to think about whether or not to pursue it more seriously."

Sole trader or limited company?

If you are earning more than £1,000 from your side hustle, you are classed, for tax purposes, as 'self-employed' and will have to register as a sole trader: a self-employed person who owns and runs their own business as an individual. You can hold this title alongside your 'employed' status and it means you will have to complete a tax return. "You fill in the self-employed section of a self-assessment tax return but you don't have to register in any other way if you remain a sole trader." You will have to claim business expenses against your trading income so you have a responsibility to keep all your receipts for everything from packaging to computing costs to camera equipment, Iona adds. You can claim reasonable working from home expenses based on the space you are using and the amount of time you are using it per week.
"Personally, I favour the sole trader route rather than setting up a limited company," Iona says. "Setting up a PLC or limited company only makes sense if your operations have grown to a substantial level, say at least £50,000. It enables you to pay yourself a modest salary (around £8,000 is recommended) but otherwise to pay yourself in dividends, which are taxed at a lower rate than income." However, there is a lot more paperwork, such as filing annually to Companies House, which is why you'll need an accountant. "It's worth noting that the pandemic has really hurt people who opted for this structure as they were excluded from the government's self-employed grant, and they will get little benefit from the furlough scheme. It's a reminder to only go in for more complex tax arrangements if it's really necessary."

Get organised

"Don't stretch yourself too thinly and bite off more than you can chew," Iona continues. "Secondly, get organised, especially with your money transfers and thirdly, keep records of all your transactions and operating costs." Iona suggests using programs such as Xero and QuickBooks, or a finance app like Coconut.
"It's very exciting when you launch your side hustle and you are full of enthusiasm," Iona says. "But think about whether you are really going to be able to commit to it because you are dealing with real people who have real commercial expectations and they will expect you to provide a professional service whatever it might be."
She continues: "So it's only for those who really have the spare capacity in their life. Only do it if it's something you will actually enjoy doing, otherwise the early enthusiasm will wane and you won't have the motivation to stay organised."