Making extra money – do I have to pay more tax? | Moneymagpie - Free tips on Debt, Shopping, Credit Cards and more!

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We at Moneymagpie are all for encouraging you to go out there and make as much extra money as you can through any means possible (well…almost!). But on the whole, with extra income comes extra tax implications and it can be really tricky to work out for yourself whether or not you should be paying tax on your money-making schemes.

This guide is designed to give you an idea of when tax will start applying to any extra money that you make. However, it can’t cover every individual circumstance. If you’re in any doubt, get personal advice from your local tax office. It’s always better to do this as soon as you think you need advice, rather than risk a load of worry and a hefty bill and/or fine later.

The basics

Everyone can earn a certain amount per year tax-free, but if you exceed this amount, you need to let the tax office (HMRC) know.
You need to register any new business within three months with HMRC, or you may be fined.
If in any doubt, consult your local tax office – they will be able to advise you fully.

Allowances

The first step is to work out whether your earnings (from any regular work combined with extra money-making) exceed your personal income allowance. For the 2012-13 tax year, everyone has the right to make up to £8,105 of income without paying taxes (£10,500 for people between 65-74 and £10,660 for those 75 and over). So, if your only income is from eBaying, babysitting or something similar, and all the money you make doesn’t add up to more than this allowance, you do not need to pay tax.

However, this allowance is already taken into account if you work part-time or full-time and you are paying tax using the PAYE scheme (when money is automatically deducted from your pay packet). So, unless your salary is under £7,475 a year, this means that you have already used up your personal allowance and therefore you should be paying tax on any extra money you make on top of your salary.

Personal allowances can vary depending on age, marital status and whether you have any disabilities so be sure to check out exactly which allowances you are entitled to here.

It is important to remember that income from a pension is also taxable. So, if you are a pensioner, you must take into account your annual pension and whether or not it exceeds your personal allowance. If it does, you should be paying tax on all other earnings. However, if the total of your pension and your extra earnings is less than your allowance, you are tax free.

Using eBay

All that seems very clear and simple, but then it gets a bit trickier. For those who use eBay, or other listings sites, to make extra money it can be difficult to distinguish between using the site to earn an income and using it merely to get rid of some junk. As Jane Moore from the Institute of Chartered Accountants puts it: “Cash in the attic is not taxable, but the Revenue will know the difference between a clear-out and a small business.”

So if you are selling on unwanted items every now and then, in theory you are liable to be taxed on any profits, but usually small earnings will be ignored.

However, if you start to buy products to then sell on, or you are regularly selling large amounts of your possessions the rules change. Again, if your profits using listing sites or classified adverts, plus any other income/salary, do not exceed the £8,105 personal allowance in one year, you do not have to pay tax. But, if you make profits that exceed your personal allowance, or are an income on top of any salary or any other money-making, you should be declaring them as they are taxable.

Regularly buying items to sell on at a profit on eBay or other sites is in effect a small business, and so it is very important to keep a tab on profits and maintain clear records, including receipts of all your expenses which can be put against your profits for taxable purposes. This way, HM Revenue and Customs will be able to accurately calculate how much tax you owe and you won’t end up paying too much. But if you do find yourself going from selling a few things here and there to developing a small business, then you must let the Revenue know within three months. Otherwise you are liable for a £100 fine.

If you’re making a tidy sum which exceeds your personal allowance, but you don’t think it qualifies as a small business, you still need to declare your profits as a new source of income within six months of the end of the financial year. This gives the Revenue time to send you a return, which you will have to complete in order to be taxed the correct amount. For details of how to declare a small business or new sources of income, check out the HMRC website.

Selling your skills

In the same way as selling your wares can gradually become a small business, so can maximising the money you can make from your personal skills. For example, if you are a keen gardener and occasionally offer to help out friends and neighbours with their landscape design for a small fee, then any earnings are, in theory, taxable although usually these are ignored on the basis that they fall within your personal allowance. However, when you start helping people on a regular basis whilst amassing a good profit, your hobby has really developed into a small business and any profits that exceed your personal allowance are taxable. As before, when a hobby becomes a business, you must declare it to the taxman within three months.

Capital Gains

Capital Gains Tax is only going to be relevant for you if you are selling any belongings that have increased in value whilst in your ownership, such as a piece of art or an antique. The first thing to know is that capital gains tax does not apply to personal items worth less than £6,000, so if you’re selling it for less then it’s not taxable. Secondly, there is a separate annual personal allowance for CGT which is currently £10,600. This means that if you sell items like jewellery or shares that are worth over £6,000, you are allowed to make up to £10,600 in profits (i.e. the difference between the price you paid for the item when you bought it and the price it was bought for from you), before CGT applies to you. Items to watch out for are second homes (CGT does not apply to principal dwellings i.e. your own home), expensive artworks, fine jewellery, stocks & shares and land. It doesn’t matter where or how you sell items that are taxable under Capital Gains – whether it’s eBay or Christie’s you should pay it. Click here for more on Capital Gains Tax.

Renting

The exception to the personal allowance rule is renting. Renting space, your house or your drive is always taxable, regardless of personal allowance. Saying this, a rental relief exemption does exist allowing you to make up to £4,250 annually from renting a room in the house in which you live. However, if you want to rent your whole house, you have to pay tax on your profits and the same goes for renting your driveway. Often arrangements for renting a room or a driveway are made on a cash-in-hand basis. However, technically, you still should be declaring these earnings and paying tax on them. Don’t be fooled, HMRC is aware of big public events such as Wimbledon, so if you live next door to the All England Club and happen to deposit a large amount of cash shortly after the tournament, they’ll be on to you.

Small extra earners

For those who do not earn a salary and have been making a bit of extra cash on the side by using cashback sites and doing a spot of mystery shopping here and there, you are probably not exceeding your personal allowance and so you do not need to pay tax. However, some of the larger companies that organise mystery shopping and online surveys will automatically take your tax and national insurance contributions out of your pay for you. This is great if you already earn a salary, as it means you don’t have to worry about your tax return, but if you aren’t exceeding your personal allowance, it’s money that you don’t need to pay. Fret not, you can get this money back in a jiffy by filling out this R40 form and sending it in, or by writing a letter to the Revenue informing them of what has happened (although this will probably take longer to process).

Extra earnings and PAYE

If you usually pay your taxes using the PAYE system and would prefer not to think about all this extra tax stuff that is indeed mightily complicated, there is something you can do to make it all go away. By changing your PAYE code with the Revenue, your extra earnings can be taken into account when you are taxed on your salary and so you will not have to pay anything extra or fill out a return. In order to change your PAYE code, you have to work out how much extra you are earning and then contact the Revenue who will help you sort it out. Although it sounds great, this solution is really only effective for the minority of cases for two reasons:

Firstly, your extra earnings can’t add up to more than £2,500, after which you really have to fill out a separate tax return.
Secondly, your extra earnings need to be quite stable so that you can pinpoint exactly how much you expect to earn in one tax year. If you are renting a property at a set rate per month/annum, this is pretty easy. However, if you are earning bits of cash here and there it becomes much more difficult to predict and you’ll end up either over or underpaying, which just leads to more form filling. Using your PAYE code to cover extra earnings also means that you pay your tax sooner, as it comes out monthly, whereas your extra earnings could be sporadic leaving you in the red some months.

Useful links

32 Responses to “Making extra money – do I have to pay more tax?”

matt says:

March 16, 2012 at 7:12 pm

Hi, I am in full time education and I work part time. I earn about £7000 per year and I am thinking of selling on ebay. I estimate the turnover to be about £300 and the profit approximately £200 each month. So my income (from ebay) would not exceed £2500 in one year. Does it mean that I would not be required to become self employed?

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helen james says:

March 6, 2012 at 2:40 am

I am self employed and my car is at the end of her days,and i was thinking about renting a car and putting this against my tax. Do i have to earn a certain amount before i can do this? Is there anything else i should know? thanks

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- Jasmine Birtles says:
  
  March 6, 2012 at 11:49 am
  
  No you don’t have to earn a certain amount – if you’re working and earning then you’re fine. Good idea to put the rental against tax, although you will need to keep a log book (in the car ideally) writing down all the business mileage you do. Speak to your accountant – they may suggest you come up with a percentage of your total mileage as business expenses if you use your car for personal use too. It’s up to you how much you think you use for business and how much for yourself.
  
  Reply
M Johnstone says:

December 18, 2011 at 11:18 pm

Some sellers worry about making a profit from selling on ebay and having to pay tax on it however sellers should be more worried about income from selling on ebay having an impact on any tax credits they currently receive.

Any profit made from selling on ebay has to be declared as income when making a claim for tax credits and unlike income tax there is no tax allownace threshold.

So all you sellers out there who make extra money from selling on ebay please remember to declare ALL income when making renewing your claim for tax credits.

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Rebecca says:

November 26, 2011 at 8:46 pm

I’ve been making things on and off for a while as a hobby. I’ve done a few craft fairs, but usually about 1 once a year and barely make back the cost for the table. I do have a full time job earning over £17,000. I’m confused about whether I have to register as a business, because of the small amount that I make. Also do I need Public Liability Insurance?

Thanks
Rebecca

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- Maya Hart says:
  
  March 22, 2012 at 8:56 am
  
  Hi Rebecca, I am in exactly the same situation as you. I think you do have to pay tax but not sure how. I think its best speaking to your enployer about this..?
  
  Reply
Robin says:

October 22, 2011 at 8:02 am

Hello,
I wonder if you could help me.

I work and pay tax via PAYE but I also earn a small amount from developing web sites as a small sideline. Approx £600 to £1200.

I am getting worried ‘cos I have not registered anywhere and would like to be legit.

Where do I do this and from when. I have been doing this for over 5 years.

Thanks,

Robin

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Claire says:

October 13, 2011 at 4:30 pm

I want to register as self employed , I have been setting up a new site for affiliate marketing , I havent earnt anything yet , but its been up and running since march 2011 , I havent registered with HMRC yet or as self employed and am worried I have missed a deadline of the 5th oct 2011 , for a tax return.
I want to backdate my business 3 months for tax credit purposes but as i have no profits will this affect me having to pay a penalty , new to all this stuff and got a rather large headache already!!!
any comments would be valuable, thank-you.

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Linzi says:

October 6, 2011 at 10:27 am

I know this is a long shot as to whether this is still being monitered but im so baffled I thought I’d give it a shot!

Im currently working PT and earning around £5000-5500 anually. Ive started making jewellery to sell on and trying desperately to work out whether this needs declaring to someone or not?? Ive been doing this for around two months, and only just ‘in the black’ (by around £20) so i cant see this being a big earner, just a little extra cash to help with baby stuff lol. Can someone tell me whether I need to do something to avoid trouble later on, or can I continue without telling anyone?
Thank You

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dsmith says:

October 29, 2010 at 1:50 pm

For the last 5 years I have had a number of websites displaying advertising on them. The income from them is small. In total it never exceeds 1200 pounds a year. I do not work at present and I do not claim any benefits. I have no other source of income other than the use of the money my partner earns and pays tax on. Do i need to register my sites as a business, or as they earnings are below my tax threshold do i just carry on as is?

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- nathan says:
  
  February 12, 2012 at 10:01 am
  
  you need to get yourself a job and stop leeching off your partner. you parasite……
  
  Reply
  - jim says:
    
    March 21, 2012 at 9:31 am
    
    Lovely reply from Nathan there. Clearly a bitter man.
    
    Reply
yadge says:

October 12, 2010 at 5:23 pm

A few years ago I was told we could earn about £10,000 a year from buying and selling shares, anymore than this you would have to pay 40%. All I keerp getting from write ups is it depends on your circumstances. Does this mean we have to pay tax on everything.I am surprised that people still buy shares and are willing to sit and answer acomplicated form.

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yadge says:

October 12, 2010 at 5:04 pm

nobody has anwered the question about how much can you make from shares before you pay tax. I thought someone told a few years ago it was about £10,000. What is it now? Don’t tell me we can’t make anything anymore, all I keep getting is it depends on your circumstances. Why is everything so complicated.

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Rob says:

October 1, 2010 at 7:42 pm

Hiya Guys n Gals,

Just read the above and would really like some advice

In the past six months i’ve made about 4k selling bits and peices on eBay, from broken laptop parts to clothes which have been used by members of my household over the past Nine years and thus sold as spares or used items.

Initially, these items would have been sold at a car boot and were being kept for the reason of selling on at a later period, but for a loss.

The ultimate question is should I be declaring this to HMRC or am I ok to keep on selling these items that I personaly have bought that either dont fit me any more or have resulted in a case of ‘Surplus to Requirements’ due to an ‘Upgrade’ or ‘Relacement’?

I fully understand that the HMRC is well above the Law, and whatever the TaxMan says, goes … for everyone, I just dont want to get in trouble.

Your support would be much appreciated.

Kind Regards

Rob

Reply
- Paul Prowse says:
  
  October 5, 2010 at 5:22 pm
  
  Hi Rob,
  
  The HMRC doesn’t tax you for a few sales if you’re just having a clear-out of unwanted items.
  
  They do tax you if you’re ‘trading’ however. (In a nutshell, ‘trading’ is buying goods with the intention of selling them on at a profit). The HMRC website provides full guidance on what constitutes trading – together with common examples.
  
  It doesn’t sound like you’re trading – however, if you look at the definition of ‘trading’ on HMRC it can be a little ambiguous (especially if substantial profits have been made). See the examples on the HMRC website and if you’re in any doubt, contact them – they will be able to quickly to put your mind at rest one way or another.
  
  Reply
Dawn says:

October 1, 2010 at 11:02 am

I am letting out a property for £100 less than the mortgage actually costs me each month – surely I don’t therefore need to pay tax on that?

On another note, out of interest, if at another stage I am paying say £500 on the mortgage but getting in £1000 each month – I presume I am liable for tax on that – but I thought I could net it off in terms of maintenance/building works etc?

Finally, This house was previously my main residence, but we moved out just before the recession and haven’t been able to sell at the right price since – I believe we have 3 years in which to sell it to avoid capital gains tax – but even past the 3 years, do we only pay capital gains on the difference between what we paid for it and what we now sell it for?

Thanks!

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Adam says:

August 27, 2010 at 4:13 pm

Hi,
I just wanted to know if I need to declare to HM and revenue extra income I may start to earn from online surveying sites? I havent got any payments since payout threhold is £40 do I have to declare this if I get any payment?

Im studying currenlty, Im 17 and doing my A levels

thanks

Reply
- Simon Willmore says:
  
  September 6, 2010 at 11:25 am
  
  Hi Adam
  
  Firstly, are you definitely allowed to partake in these surveys as you are under 18?
  
  Any person in the UK under 65 should declare their earnings to HMRC, but unless you make over £6475 in a year you will not pay tax.
  
  Reply
Steve says:

July 14, 2010 at 12:31 pm

Hi Guys,
I know this is a bit of an old post, i’m not sure if it’s still being monitored or not?!

I work full time and pay tax by PAYE, i’m doing a one off project outside of my normal hours/pay whichi will bring in at most a couple hundred pounds.

It seems overkill to declare this? do i need to?

Reply
- Jasmine Birtles says:
  
  July 14, 2010 at 5:21 pm
  
  Hi Steve,
  
  I know what you mean – I would think the same way because it seems such a small amount. However, I know that HMRC are quite strict about it so I checked with the Chartered Institute of Taxation and this is what they said:
  
  Yes, I’m afraid you do. You don’t say if the payment is from your usual employer of from a third party. If it is from your usual employer then they should probably deduct PAYE. If it is from a third party for work not connected with an employment then it will probably be treated as income from self-employment. You should notify HMRC of the new source of income by 5 October after the tax year (you can do this online via their website). They may send you a tax return to complete or alternatively might include a deduction in your PAYE code.
  
  From Tina Riches, Director, Technical, CIOT
  
  So, there you have it! The important thing, though, is to keep all your expenses related to this extra earner. You then offset these expenses against your income from it and that will bring the tax down hugely, possibly to nothing.
  
  Reply
Taneka Gehrki says:

June 15, 2010 at 12:04 pm

Thanks for your article! I was searching for free classified advertising and classified related articles when I came across your website post on Google. This is exactly what I was looking for. Thanks for the share. I’ve bookmarked this post for future reference Nice comments – Catch Ya

Reply
polyxena11 says:

January 8, 2010 at 7:24 pm

No one really answered Richard’s question about when to register as self-employed after starting a business out of hobby. I too am trying to do the same but I’m spending more money on materials than actually making money. I don’t want my ‘self-employed/ status to affect my tax credits either, because we really need it to get by at the moments. It would be great if someone could give some insight. Thanks.

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Clare says:

December 15, 2009 at 1:27 am

I make jewellery as a hobby and several friends have suggested I sell it on ebay, advising I can make up to a certain amount before I’m taxed. However I think they may be confusing this with the Personal Allowance. I’m in full time employment paying tax, NI etc earning over 15,000. Am I right in thinking that even if I’m only making a small amount of extra cash I would still have to declare this, as I would not be selling on unwanted items but making them specifically to sell? It’s all so confusing!

Reply
- Jasmine Birtles says:
  
  December 16, 2009 at 4:10 pm
  
  Good question. In fact, so good that I’ve asked tax expert John Whiting from the Chartered Institute of Taxation to answer it properly. Here’s what he says:
  
  It sounds as if what you are planning will be regarded as a business and so you are right: you’ve already used up your tax-free personal tax allowance (currently £6,475) and so any profits that you make will be taxable. It would be treated as a self-employment, there would be a need for you to notify HMRC of your new activity and (if it really takes off!) you may end up having to register for VAT.
  
  If what you were doing was ‘selling on unwanted items’, which is what many people will be doing, then that wouldn’t rank as a business but might fall into the capital gains tax net. Even then, most things being sold won’t be caught for CGT: there are various exemptions, including chattels with an expected life of under 50 years and things which sell for under £6,000. What would typically be caught for CGT would be things like paintings and antiques – and even then there is the annual CGT exemption, currently £10,100.
  
  The dividing line between odd sales of bits and pieces and a business isn’t a precise one and can cause difficulties. In most cases it will be obvious that there is (or isn’t) a business, but what tips the activity into being a business are features such as:
  
  Frequency/volume of transactions
  Extra work done on the items in question
  Motive: what was the aim here; what other things does the taxpayer do
  
  Reply
paula says:

October 4, 2009 at 10:28 pm

My friend is moving abroad for a while and she is renting the rooms in her flat, he’s asked to collect the rent son my account and then to transfer it to her account. If I do so, do I need to pay taxes on it? Will it look like I’m earning extra money?

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Jasmine Birtles says:

May 26, 2009 at 5:08 pm

Good questions Richard. I’ve put it on the Forum here http://www.moneymagpie.com/forums/topic.php?id=23&replies=1#post-103 to see if anyone has some good thoughts on it.

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Richard says:

May 22, 2009 at 4:39 pm

I am thinking about starting up a business born out of a hobby, I work fulltime, pay NI, Tax etc. Am I right in assuming I would have to register the project as a Business within 3 months, and if so, when would they consider the 3 months starting from? First Pay check? It could be a year until i would see a paying customer. I am thinking of advertising, but it may amount to nothing, so what would the best advise be and also any idea as to how much they might want…. for instance if the business bought in 10k a year.

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Jasmine Birtles says:

May 22, 2009 at 1:46 pm

I think you should probably get public liability insurance as you will have children in your own home – you never know what could happen. As for declaring it, it does sound to me like just covering costs so it probably isn’t worth it, although if you end up doing this every week for months on end then it will become a small business. In which case you should speak to the HMRC (www.hmrc.gov.uk) and get advice from them. You would probably need to get a separate tax code and make sure you keep receipts for expenses and records of money coming in.

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Lizzie says:

May 21, 2009 at 9:38 am

I wanted to set up an art club for the children in my street where I live (over the summer holidays), I would only charge £5 per child per session to cover materials and refreshments. Would I have to register with anyone or declare what I earn even if it is to pay for the supplies? Also would I need insurance to have the children in my home? I am training to be a teacher so have had criminal record checks, I also will know the parents of the children as they live in my street.

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Jasmine Birtles says:

May 15, 2009 at 3:21 pm

Not exactly Steve! However, they do make spot checks regularly. If you haven’t declared substantial amounts of income you can get yourself into really hot water later on.

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steve says:

May 15, 2009 at 12:00 pm

In this article, (Don’t be fooled, HMRC is aware of big public events such as Wimbledon, so if you live next door to the All England Club and happen to deposit a large amount of cash shortly after the championship, they’ll be on to you.) Does this mean HMRC have a live feed to everyone’s bank accounts, so they can see how much goes into your account, and when?

Reply