Lots of people are trying to generate more money and alternative incomes during the cost-of-living crisis, but they need to make sure they are up to date on the tax rules around earning extra money to avoid the taxman asking for unpaid dues.

More than one in three adults has more than one income stream, according to Utility Warehouse, as people look to take on more jobs or turn a hobby into a money-making venture. The organisation found that people made on average £780 a month through these side hustles.

But whether you’re earning money on the side just to boost your income or you plan for it to become your main job, make sure you’re paying the right tax on the money now to avoid a nasty surprise from the taxman later on.

WHAT ARE YOUR TAX-FREE LIMITS?

Everyone gets a personal allowance of £12,570, which is the amount of money they can earn in a year before they start to pay income tax.

If you earn less than this amount through all your income then you’ll pay no income tax on it. Lots of people with an employed job will use up this tax-free allowance from their main employment, but if you earn less than this you can use the remainder for your side hustle earnings.

There is also a trading allowance, which means you can earn £1,000 a year from property or trading income tax free. This is great for people doing a bit of work on the side, for example babysitting or selling items on an online marketplace. The good news is that if you earn less than £1,000 a year from your side hustle then you won’t usually need to fill out a tax return, but check out any exemptions here. Just make sure you keep track of any relevant paperwork proving your income in case HMRC asks for it later.

If you earn more than £1,000 from your side hustle in a tax year, you’ll still benefit from the tax break but you’ll need to fill out a tax return to declare the extra income and pay any relevant tax. Also, if you’re earning more than £1,000 and are buying and selling stock HMRC will deem that a business, which means you need to register it as a company or register as a sole trader.

If you’re registered as a sole trader or company, you’ll have the choice of whether you claim the £1,000 trading allowance or whether you forego that and instead deduct expenses from your gross income and pay tax on the rest. It will depend on your circumstances which is most tax efficient.

WHAT ABOUT FOR RENTING OUT PROPERTY?

The Government also gives a tax break for anyone who rents a room out in their home. Lots of homeowners are looking at doing this activity to generate extra money and counteract the rising cost of mortgages. You can make up to £7,500 a year tax free through rent-a-room relief.

You must be renting out a room in your home, rather than a separate flat, and the room must be furnished. But it’s not limited to a room, you can rent out as much of your home as you like.

You can also use it if you run a bed and breakfast or guest house, so long as it’s in the same property you live in. Interestingly you don’t even need to own the home to benefit, you could be renting out part of your rental property – however you’ll need to check that your lease doesn’t prohibit that activity.

You don’t have to let the room for a minimum period of time. But be aware that if you jointly own the property with someone and split the income you only get half the relief per person. If you earn less than £7,500 a year you won’t need to fill in a tax return, but if you earn more than the tax-free limit you will.

WHAT ABOUT A SECOND JOB?

If you take on a second job, you’ll just need to fill out the usual new-starter paperwork with your employer and if you’re paid through PAYE, you’ll pay any tax you owe through your pay, as usual. It means you won’t need to fill out a self-assessment tax return unless you need to for another reason.

It’s worth checking that your current employer doesn’t have any rules around taking on an extra job or working more hours. One thing to consider is that your additional income might mean you hit certain tax thresholds – it might push you into the higher-rate income tax bracket, for example, or mean you hit the taper point for child benefit. So just bear that in mind and factor it in.

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