1. Misunderstanding Allowable Expenses
One of the most frequent tax pitfalls for UK side hustlers is misunderstanding what counts as an allowable business expense. This lack of clarity often leads to two extremes: some over-claim by including personal or non-permissible costs, drawing unwanted attention from HMRC, while others under-claim and end up paying more tax than necessary. In the UK, allowable expenses are those costs that are “wholly and exclusively” incurred for your business—think of things like office supplies, certain travel costs, or professional subscriptions. However, there are strict rules about what can and cannot be claimed, and grey areas such as working-from-home expenses or part-business, part-personal purchases can trip you up. It’s vital to keep clear records and only claim legitimate business expenses; if in doubt, consult official HMRC guidance or a qualified accountant. Getting this right not only keeps you compliant but could also save you a significant amount on your tax bill.
Ignoring the Trading Allowance
Many UK side hustlers overlook the £1,000 trading allowance, which is a simple yet powerful tool designed to ease tax burdens for those earning extra income. This oversight can lead to two common issues: either unnecessarily filing self-assessment tax returns when it’s not required, or missing out on valuable tax-free income that could have reduced your overall tax bill.
What Is the £1,000 Trading Allowance?
The trading allowance lets you earn up to £1,000 from self-employment or miscellaneous trading without having to pay tax on that amount. If your total trading income for the year is less than this threshold, you may not even need to register with HMRC or file a tax return—saving you time and hassle. However, if your earnings exceed £1,000, you must declare them, but you can still deduct the allowance from your taxable profits.
Common Mistakes Involving the Trading Allowance
| Mistake | Consequence |
|---|---|
| Not claiming the allowance | Pays more tax than necessary |
| Filing a tax return when under £1,000 | Unneeded paperwork and stress |
| Confusing employment and trading income | Poor record-keeping; potential compliance issues |
How to Avoid This Mistake:
- Check your annual side hustle earnings—if they’re below £1,000, you might not need to register or file.
- If above £1,000, ensure you claim the allowance on your self-assessment form to reduce taxable profits.
- Keep separate records for employment and trading income, as only trading qualifies for this allowance.
- If in doubt, consult HMRC guidance or speak to an accountant familiar with UK side hustle rules.
Remember: using the trading allowance wisely can simplify your finances and keep more of your hard-earned money in your pocket—don’t let this easy win slip by unnoticed.
3. Confusing Self-Employment with Employment
One of the most frequent tax slip-ups UK side hustlers make is misunderstanding their employment status. It’s easy to assume that your weekend gig or freelance work is simply a bit of “extra” money, but HMRC sees things differently. If you’re earning money independently—whether through tutoring, baking, design work, or any other side business—you’re likely considered self-employed for tax purposes. Failing to recognise this and not registering as self-employed with HMRC can result in unwelcome penalties and missed opportunities to claim legitimate business expenses.
Why Registration Matters
If you earn more than £1,000 per year from your side hustle (the current trading allowance), you’re required by law to register as self-employed with HMRC. Many people delay or overlook this step, thinking their main job covers all their tax needs. Unfortunately, the taxman doesn’t see it that way: if you don’t register promptly, you risk fines and could even face backdated charges.
Common Misconceptions
- Assuming your employer will handle all your taxes—even for your side income
- Believing that only full-time businesses need to register as self-employed
- Thinking that occasional freelance gigs don’t count as running a business
How to Avoid This Mistake
The solution is straightforward: if you’re making over the £1,000 threshold from any self-driven activity, register as self-employed with HMRC as soon as possible—ideally within three months of starting your side hustle. This opens the door for you to file a Self Assessment tax return each year and also lets you claim back allowable expenses such as equipment, travel costs, and even a portion of your home bills if you work from home.
Understanding the difference between being an employee (where taxes are handled through PAYE) and being self-employed (where you manage your own tax affairs) is key. Take action early to avoid unnecessary stress and ensure you make the most of available tax-saving measures.
4. Neglecting to Keep Proper Records
For UK side hustlers, maintaining thorough and accurate records is not just good practice—it’s a legal requirement under HMRC guidelines. Inadequate record-keeping makes tax returns stressful and increases the risk of errors, fines, or missed claims for expenses. Far too often, side hustlers rely on memory or scattered receipts, which can result in underreporting income or overlooking legitimate deductions.
Why Good Record-Keeping Matters
Without proper documentation, you might:
- Miss out on claiming allowable expenses—meaning you pay more tax than necessary
- Struggle to provide evidence if HMRC queries your return
- Risk penalties for late or inaccurate submissions
What Records Should You Keep?
The following table outlines essential records every UK side hustler should maintain:
| Type of Record | Examples | How Long to Keep (Years) |
|---|---|---|
| Income Records | Invoices, bank statements, PayPal/Stripe reports | 5 |
| Expense Receipts | Travel costs, office supplies, software subscriptions | 5 |
| Mileage Logs | Date, purpose, distance of business journeys | 5 |
| Correspondence with Clients/Suppliers | Emails, contracts, agreements | 5 |
| Tax Filings & Calculations | Submitted returns, working papers, HMRC letters | 5 |
Best Practices for Easy Record-Keeping
- Go digital: Use accounting apps like FreeAgent or QuickBooks for UK-compliant bookkeeping.
- Separate finances: Open a dedicated business account to avoid mixing personal and side hustle funds.
- Set reminders: Allocate time weekly or monthly for updating your records—little and often beats a year-end scramble.
- Back up data: Cloud storage ensures you won’t lose vital documents if your laptop fails.
Avoiding This Mistake Means Less Stress Come January!
Taking record-keeping seriously means fewer headaches at tax return time and puts you in a stronger position if HMRC ever asks questions. It’s one of the simplest ways to protect your side hustle’s profits and peace of mind.
5. Missing Deadlines and Payments
One of the most frequent pitfalls for UK side hustlers is missing Self Assessment deadlines or overlooking payments to HMRC. It’s surprisingly easy to let important dates slip by, especially when juggling a day job, family commitments, and a growing side business. However, failing to submit your tax return or make payments on time doesn’t just create unnecessary stress—it leads directly to penalties and interest charges from HMRC.
Self Assessment tax returns are typically due by 31st January each year if you file online (or 31st October for paper returns), with any tax owed payable by the same January deadline. Miss these cut-offs and you’ll incur an automatic £100 penalty, with further fines and interest piling up if you continue to delay. These costs can quickly eat into your side hustle profits.
Why Do Side Hustlers Miss Deadlines?
The sheer volume of admin can be overwhelming when you’re new to self-employment or balancing multiple income streams. Many side hustlers underestimate the importance of tax planning, don’t set calendar reminders, or simply aren’t aware of their legal obligations until it’s too late. Some assume that HMRC will send plenty of warnings—which isn’t always the case, especially if your address or contact details aren’t up to date.
How To Avoid This Mistake
- Set Multiple Reminders: Mark the key Self Assessment deadlines in your digital calendar and set alerts well in advance. This gives you time to gather receipts, double-check figures, and resolve any issues before the rush.
- Register Early: If it’s your first year filing as a side hustler, register for Self Assessment as soon as possible—HMRC can take several weeks to process new registrations and send out your Unique Taxpayer Reference (UTR).
- Automate Where Possible: Use accounting software or cloud-based tools designed for small businesses in the UK. Many will prompt you about upcoming deadlines and even estimate what you owe.
- Budget For Your Tax Bill: Set aside money throughout the year so you’re not caught short come January. Even a simple separate savings account can help prevent last-minute scrambles for funds.
Takeaway
Missing tax deadlines is a costly but entirely avoidable mistake for UK side hustlers. With careful organisation, early preparation, and a proactive approach, you’ll save yourself money and hassle—giving you more time and resources to focus on growing your side business.
6. Underestimating the Impact of National Insurance Contributions
One frequent misstep UK side hustlers make is overlooking how additional income affects their National Insurance Contributions (NICs). Many assume that NICs only apply to their main job, but if your total self-employed profits exceed certain thresholds, you’ll need to pay Class 2 and Class 4 NICs. Ignoring this can result in underpayment, leading to future headaches with HMRC and even gaps in your state pension record.
Why This Matters for Side Hustlers
If you’re running a small business or freelancing on the side, it’s easy to focus solely on income tax and let NICs slip under the radar. However, paying the right NICs isn’t just about staying compliant—it also protects your entitlement to benefits like the State Pension, Maternity Allowance, and Employment Support Allowance.
Key Thresholds to Watch
For the 2023/24 tax year, if your self-employed profits are above £12,570, you’ll generally need to pay Class 2 and Class 4 NICs. Missing these payments could mean not qualifying for a full state pension down the line, or facing unexpected bills from HMRC when they catch up with your accounts.
How to Avoid This Mistake
Keep clear records of all your side hustle income and regularly review whether you cross the relevant thresholds for NICs. Use HMRC’s online calculators or speak with an accountant familiar with UK self-employment rules. Set aside money throughout the year—not just for income tax but also for both classes of NICs—to avoid nasty surprises at tax time. Staying proactive with your NIC obligations ensures you keep on the right side of HMRC and safeguard your future entitlements.
7. Overlooking VAT Registration Thresholds
Failing to watch turnover in relation to the VAT threshold can land side hustlers in hot water with HMRC if they don’t register on time. Many UK side hustlers focus on growing their income, but it’s all too easy to miss the point at which your total taxable turnover exceeds the current VAT registration threshold (£85,000 for the 2023/24 tax year). This isn’t just a bureaucratic box-ticking exercise—missing this deadline could result in unexpected tax bills and penalties that might eat into your hard-earned profits.
Understanding the VAT Threshold
The VAT registration threshold applies to your gross turnover—not just profit—from all business activities over any rolling 12-month period, not just within a single tax year. This means you need to be regularly tracking your income, especially if you have multiple income streams or fluctuating sales. Even a sudden spike in sales from a successful promotion or event can tip you over the limit before you realise it.
Consequences of Late Registration
If you exceed the threshold and fail to register for VAT promptly, HMRC can backdate your registration and demand VAT on all sales from the date you should have registered. That’s not only stressful but could also mean paying out of pocket if you didn’t charge customers VAT at the time. In addition, there may be penalties and interest added on top of what you owe.
How to Stay Ahead
Make it a habit to check your rolling 12-month turnover every month. Set calendar reminders or use accounting software that flags when you’re approaching the threshold. If you’re getting close, seek advice from an accountant so you can plan for VAT registration and adjust your pricing accordingly. Being proactive can help avoid unnecessary costs and keep your side hustle compliant—and thriving—in the long run.
