HMRC will increase your tax-free Personal Allowance by an extra £1,000 with a rule about tax on so called ‘side hustles’.
Personal finance experts at AJ Bell have pointed out how you can earn an extra £1,000 tax-free on top of your standard £12,570 Personal Allowance in a given tax year by taking advantage of the fully legal HMRC rule on extra income.
Recently, the government announced an extension to the freeze on income tax thresholds first put in place in 2021, which means, as well as the higher tax bands, the standard £12,570 Personal Allowance will have been frozen for a decade by 2031.
The Personal Allowance is the amount you can earn without paying any tax on it. Then, you must pay 20% of every £1 earned over that amount, and 40% of every £1 over £50,270, and then 45% of every £1 over £125,140.
Due to the freeze, more and more people will be pulled into paying tax for the first time as wages increase, in a phenomenon known as ‘fiscal drag’.
But Laura Suter, director of personal finance at AJ Bell, has explained to the Express how the HMRC side hustle income tax works to effectively boost your tax-free earnings in a single year.
She said: “Everyone can earn up to £1,000 tax free from side hustles or other money-making endeavours that are separate from their main job.
“The so-called ‘trading allowance’ means that if you earn £1,000 from property or trading income it will be tax free – if you’re a basic-rate taxpayer this will save you up to £200 a year, or £400 a year for a higher-rate taxpayer.
“It’s great for people doing a bit of work on the side, for example babysitting, selling items on an online marketplace as a business, renting out your driveaway, dog-walking or even selling jam at the local market.
“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.
“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.”
