Tax experts at AJ Bell have highlighted an HMRC rule that can effectively increase an individual's tax-free Personal Allowance by an extra £1,000, bringing it to a total of £13,570 in any given tax year. This is achieved through the 'trading allowance' on side hustle income.
How the Trading Allowance Works
The trading allowance permits anyone to earn up to £1,000 from side hustles or other money-making activities separate from their main job without paying tax. This applies to income from property or trading activities. For a basic-rate taxpayer, this could save up to £200 a year, while a higher-rate taxpayer could save up to £400 annually.
Examples of Side Hustles
Laura Suter, director of personal finance at AJ Bell, explained that the rule is beneficial for those engaging in activities such as babysitting, selling items on online marketplaces as a business, renting out a driveway, dog-walking, or selling homemade goods like jam at local markets.
Tax Return Requirements
If the side hustle income is less than £1,000 in a tax year, individuals typically do not need to fill out a tax return. However, it is advisable to keep relevant paperwork in case HMRC requests it later. For those earning more than £1,000, the tax break still applies, but a tax return must be submitted to declare the extra income and pay any applicable tax.
Context of Frozen Tax Thresholds
The government has extended the freeze on income tax thresholds originally set in 2021, meaning the standard £12,570 Personal Allowance will remain frozen until 2031. This freeze, combined with wage increases, is expected to pull more people into paying tax for the first time—a phenomenon known as 'fiscal drag'. The trading allowance offers a way to mitigate this effect for those with additional income streams.
