The rise of the digital economy has created countless opportunities for people to earn extra income outside their main jobs. Whether you’re selling products on online marketplaces, renting out a spare room, creating content, offering freelance services, or working as a delivery driver, a side hustle can provide valuable additional income.
However, many people assume that small amounts of extra income do not need to be declared to HMRC. This isn’t always the case.
Understanding the UK’s trading allowance rules can help you determine when income should be reported, whether tax is payable, and what records you should keep.
Growth of the Side Hustle Economy
Side hustles have become increasingly common in recent years. Popular examples include:
- Selling items on eBay or Vinted.
- Renting accommodation through Airbnb.
- Freelancing through online platforms.
- Working as a delivery driver.
- Earning money through content creation.
- Providing gardening services.
- Babysitting.
- Renting out personal equipment.
While these activities may seem informal, the income generated can still fall within HMRC’s tax rules.
Government Plans to Increase the Reporting Threshold
The government has announced plans to increase the self-assessment reporting threshold for trading income from £1,000 to £3,000 during the current parliament, with the proposed changes expected to be introduced by 2029.
The aim is to reduce the administrative burden for people who earn relatively small amounts from occasional trading activities.
However, it’s important to understand that this proposal does not increase the trading allowance itself.
The trading allowance will remain at £1,000, which means:
- Tax may still be due even if you are not required to submit a Self Assessment tax return.
- Some individuals may need to use HMRC’s proposed simplified online service to pay tax.
- Reporting requirements and tax liabilities will continue to be separate issues.
What Is the Trading Allowance?
The trading allowance is a tax exemption that allows individuals to earn up to £1,000 per tax year from self-employment or casual trading activities without paying tax on that income, provided no other reporting requirements apply.
In many cases, if your trading income is £1,000 or less, you won’t need to:
- Pay tax on that income.
- Register as self-employed.
- Report the income to HMRC.
However, your circumstances may create other reporting obligations, so it’s always important to review your overall tax position.
How Are Taxable Profits Calculated?
There are two methods for calculating taxable profits under the trading allowance rules.
1. The Profit Method
Under the standard method, taxable profit is calculated by deducting:
- Allowable business expenses.
- Capital allowances (if applicable).
Formula:
Business income – allowable expenses = taxable profit
2. Partial Relief Through the Trading Allowance
Instead of claiming actual expenses, you can choose to deduct the £1,000 trading allowance from your trading income.
Formula:
Business income – £1,000 trading allowance = taxable profit
Whichever method you choose, any taxable profits may still be subject to:
- Income tax.
- National Insurance contributions (NICs).
When Is the Trading Allowance Beneficial?
The trading allowance can be particularly useful when your business expenses are relatively low.
Example 1: Using the Trading Allowance
| Description | Amount |
| Trading income | £3,000 |
| Actual expenses | £400 |
| Trading allowance | £1,000 |
Using the trading allowance would reduce taxable profits to £2,000, which is more beneficial than claiming £400 of actual expenses.
Example 2: Claiming Actual Expenses
| Description | Amount |
| Trading income | £5,000 |
| Actual expenses | £1,800 |
| Trading allowance | £1,000 |
In this case, claiming £1,800 of actual expenses would produce a lower tax bill.
Important Limitations of the Trading Allowance
The trading allowance cannot always be used.
The allowance cannot create a trading loss
The trading allowance can reduce taxable profits to zero, but it cannot create a loss.
The £1,000 limit applies to all trading income
If you already operate a self-employed business, you cannot claim a separate £1,000 allowance for an additional side hustle.
The allowance applies to your combined trading income.
You cannot claim the allowance in certain situations
The trading allowance cannot be claimed if income is received from:
- A company that you or a connected person owns or controls.
- A partnership in which you or a connected person has an interest.
- Your employer.
- Your spouse’s or civil partner’s employer.
Should You Register Even If You Don’t Have To?
In some situations, registering for Self Assessment may still be worthwhile.
Registration may help you:
- Protect your National Insurance record through voluntary Class 2 contributions (if eligible).
- Demonstrate self-employed earnings when claiming Maternity Allowance.
- Meet eligibility requirements for tax-free childcare.
- Claim trading losses that may be carried forward to future tax years.
Even if your income is relatively small, registering could provide long-term benefits.
Online Platforms Are Reporting Information to HMRC
Many people believe that income earned through digital platforms isn’t visible to HMRC.
This is no longer the case.
Under international reporting rules, online platforms are required to collect and report information about certain sellers and service providers.
These rules can apply to people using platforms for:
- Online selling.
- Holiday rentals.
- Freelancing.
- Delivery services.
- Ride-sharing.
- Content creation.
Example: eBay Reporting Rules
eBay may report information to HMRC when a seller:
- Completes 30 or more transactions during a calendar year, or
- Generates €2,000 or more in sales after adjustments for fees, commissions, and cancellations.
It’s important to remember that these thresholds only determine when a platform must report information.
They do not determine whether tax is due.
This means:
- A seller may be reported to HMRC without owing any tax.
- A seller may owe tax even if they don’t meet the platform’s reporting threshold.
Keep Good Records
As HMRC receives increasing amounts of information directly from online platforms, maintaining accurate records has become more important than ever.
You should keep records of:
- Sales income.
- Invoices.
- Receipts.
- Business expenses.
- Platform statements.
- Payment records.
Good record-keeping will make it easier to calculate profits accurately and claim any available deductions or tax relief.
Frequently Asked Questions (FAQs)
1. Do I have to pay tax if I sell items on eBay?
Not necessarily. Selling unwanted personal possessions doesn’t automatically create a tax liability. However, regularly buying and selling items for profit may be considered a trading activity.
2. What is the current trading allowance?
The trading allowance is £1,000 per tax year.
3. Is the trading allowance increasing to £3,000?
No. The government has proposed increasing the self-assessment reporting threshold to £3,000, but the trading allowance will remain at £1,000.
4. Can I claim both business expenses and the trading allowance?
No. You must choose either your actual allowable expenses or the £1,000 trading allowance.
5. Do online platforms share information with HMRC?
Yes. Many digital platforms are required to collect and report information about certain sellers and service providers to HMRC.
6. Can the trading allowance create a trading loss?
No. The trading allowance can reduce profits to zero, but it cannot create a loss.
Final Thoughts
A side hustle can be an excellent way to supplement your income, but it also creates potential tax responsibilities.
The proposed increase in the self-assessment reporting threshold may simplify administration for many people. However, the £1,000 trading allowance remains unchanged, and tax may still be payable even when a tax return isn’t required.
If you earn money through online selling, freelancing, short-term rentals, content creation, or any other side activity, understanding the rules and keeping accurate records will help you stay compliant and avoid unexpected tax issues.