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 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
- Using eBay
- Selling your skills
- Capital gains
- Small extra earners
- Extra earnings and PAYE
- 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’ll be able to advise you fully.
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 2015–16 tax year, everyone has the right to make up to £10,600 without paying taxes (£10,660 for those born before April 6 1938). So, if your only income is from eBay selling, babysitting or something similar, and all the money you make doesn’t add up to more than this allowance, you don’t need to pay tax.
However, this allowance is already taken into account if you work part-time or full-time and you’re paying tax using the PAYE scheme (when money is automatically deducted from your pay packet). So, unless your salary is under £10,600 a year, this means that you’ve 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 what you’re entitled to here.
It’s important to remember that income from a pension is also taxable. So, if you’re 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 extra tax on all other earnings. However, if the total of your pension and your extra earnings is less than your allowance, you’re tax free.
All that seems very clear and simple, but then it gets a bit trickier. For example a lot of people make money selling things on eBay. For those who do sell on 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 in England and Wales (ICAEW) 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’re selling unwanted items every now and then, in theory you’re 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 are regularly selling large amounts of your possessions then the rules change. Again, if your profits using listing sites or classified adverts, plus any other income/salary, do not exceed the £10,600 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’re taxable.
Regularly buying items to sell on at a profit on eBay or other sites is in effect a small business, and so it’s 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 tax 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 HMRC know within three months. Otherwise you’re 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 HMRC 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.
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’re 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. However, these are usually 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 tax is only going to be relevant for you if you’re 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 doesn’t apply to personal items worth less than £6,000, so if you’re selling it for less then it’s not taxable.
Secondly, there’s a separate annual personal allowance for CGT which is currently £11,000. This means that if you sell items like jewellery or shares that are worth over £6,000, you’re allowed to make up to £11,000 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.
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.
If you don’t earn a salary and you have been making a bit of extra cash on the side by using cashback sites, online surveys and doing a spot of mystery shopping here and there, you’re probably not exceeding your personal allowance and so you don’t 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 HMRC informing them of what’s happened (although this will probably take longer to process).
If you usually pay your taxes using the PAYE system and would prefer not to think about all this extra tax stuff that’s indeed mightily complicated, there’s something you can do to make it all go away. By changing your PAYE code with HMRC, your extra earnings can be taken into account when you’re taxed on your salary and so you won’t 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’re earning and then contact HMRC 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’re renting a property at a set rate per month/annum, this is pretty easy. However, if you’re 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.
If you have turned your small business into a nice profit maker and you are now making profits in excess of your personal allowance, it may be worth considering incorporating the business into a limited company.
Although incorporation has more regulations as you will have to file the accounts each year at both companies house and HMRC, it has some significant benefits, such as:
- It offers the people running it more protection than a self-employed business
- It allows you to protect the company name by registering it at Companies House
- It can be more tax efficient.
Nordens have developed a free to download app where you can see if incorporation is beneficial based on differing profit levels which you can get here.
Ways to make more money
If you’re looking for inspiration on how to make more money, make sure you check out MoneyMagpie’s ways to make money section. We’ve got loads of ideas on how to bump up your bank balance!