01 June 2021
Despite news that wage growth has finally caught up with inflation, it still feels like our money doesn’t go as far as it used to. So, if you want to top up your spending, or saving power, then it might be worth considering earning a little extra cash on the side – and you can do this tax free.
There are two special tax allowances – the trading allowance and the property allowance. Both let you earn up to £1,000 of trading or property income each financial tax year and not pay tax on this income. You don’t even need to let the tax man know you’re making this money. If your income from these sources exceeds these limits then you will have to register for self-assessment and let HRMC know.
The good news is you can still elect to use your tax-free allowance. Alternatively, you may find it you’re better off to deduct business expenses or other allowances instead. Remember, the £1,000 allowance is for turnover, i.e. the money you bring in, not profits. So if you spend £200 on ingredients for making cakes to sell, you can only make a profit of £800. You’ll still need to keep track of all your income and keep records of things such as invoices, receipts and bank statements.
Originally this tax break was announced to encourage people who do things like sell on eBay. But it’s actually for anyone with an entrepreneurial spirit. It covers the sale of goods or services, so you could be a blogger, a baker or a babysitter. You can also take advantage via the sharing economy, such as hiring out your car or lawnmower.
The property allowance can also work via the sharing economy by renting out physical space you own. So it could be a room via AirBnB, or perhaps your driveway for parking, or even your loft for storage.
Alternatively, if you rent out a room in your house, then you may qualify for Rent a Room relief. Here you can earn up to £7,500 of rental income free from tax, provided you meet certain conditions.
The income limit will generally include everything you are charging your tenants and you won't be able to deduct any related expenses from your rental income. You don't need to do anything except keep a record of your income. But you won’t be able to use this allowance on income from letting a room in your own home under the Rent a Room Scheme.
You can also choose to have your rental income taxed under normal tax rules. This will allow you to offset any rental income against your expenses. However, you will need to let HRMC know.
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