The Covid-19 pandemic has put people’s jobs into a different perspective. From being furloughed to moving toward a work from home basis, the pandemic has opened our eyes to new ways of working, and many people have taken up side hustles for added income streams.
So much so that the UK’s side hustle economy is now estimated to be worth around £346 billion with around 1.2 million freelancers working in the UK.
But being your own boss comes with great responsibilities – and tax. Stats show that 17.34 per cent of freelancers don’t declare their earnings and choose to conceal their incomes from HMRC.
However the stakes are high here – get it wrong and you could be out of pocket or worse, be fined.
All of which poses the question: how and when and how should you be paying tax on your side hustles.
Fortunately help is at hand. Optimal has teamed up with TaxScouts to help freelancers overcome the dreadful tax season and make tax work for them like a true boss.
Don’t leave it until the last minute
Contrary to popular belief, you don’t actually have to pay your tax bill when you file your tax return. You can file and pay anytime from April 6, the start of the new tax year.
What happens when you file is that you’ll generate the figure that you owe. This means that the sooner you file, the more time you’ll have to get faster tax refunds (if you’re owed one), to address any discrepancies with HMRC, or to save up to pay your bill – you can even set up a payment plan with them if you can’t pay it in a single lump sum.
Save, save, save…for National Insurance
Even if you earn less than the tax-free personal allowance, you still need to pay National Insurance.
There are many state-provided benefits you can claim with National Insurance – be it accessing the NHS, the state pension, Disability Allowance and more.
Make the most of your tax-free pension contribution
As with all things tax, there’s a limit to take into account when you’re saving into your pension. The annual pension allowance is £40,000 per year, or 100 per cent of your income. Whichever is lower.
Translation? You can contribute up to £40,000 every year tax-free. But any contributions that exceed this will mean that your private pension tax relief will be removed.
Tax-efficiency is not the same as tax evasion
There are various tax-efficient financial tools that can reduce your tax rate so you can earn the most money, while owing the least in tax. For example, you can claim tax relief on the money you contribute to your pension and your pension pot can grow pretty much tax-free up to a certain threshold.
You could also consider investing in a startup and get the tax back on your investment through your tax return. Even if you’re not a professional angel investor, you could consider crowdfunding platforms such as Seedrs and Crowdcube or VCT brokers like Hargreaves Landsown or WealthClub.
Claim your money
One of the benefits of filing a tax return is that you can claim money back on some of the things you may have purchased for your freelancing jobs. But be aware that you can only do this if you don’t claim the Trading Allowance.
As long as you can prove that the expenses that you’re claiming are ‘wholly and exclusively’ for your business, then they are tax deductible. So remember to keep your receipts.
TaxScouts’ brand new ebook, Tax 101: Surviving the Hustle Economy, aimed at helping freelance hustlers understand how painless tax can really be, is out now. Download your free copy here.
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