March 5, 2025
By Merranti

The Tax Implications of Side Hustles: Selling Online and Providing Services

The concept of a side hustle—a way of earning extra income alongside a main job—has become increasingly popular in recent years. Many individuals turn to online platforms such as eBay, Amazon, Etsy, and Facebook Marketplace to sell goods or services. While this can be a great way to earn additional income, it is essential to understand the potential tax implications that come with it.

This article will cover when and how income from side hustles may be subject to income tax, capital gains tax (CGT), and value-added tax (VAT). We will also explore HMRC’s increasing scrutiny of online sales and what sellers need to know to remain compliant.

When Is Side Hustle Income Taxable?

Not all income generated from selling online or providing services is automatically taxable. HMRC considers different factors to determine whether income tax applies.

Non-Trading: Selling Personal Items

If you are simply selling unwanted personal items, such as clothing, furniture, books, or collectibles, these are not considered part of a business. In such cases:

The income is not subject to income tax.
However, capital gains tax (CGT) may apply if you sell high-value items.

CGT on Personal Items (Chattels)

Personal possessions (known as chattels) are usually exempt from CGT unless:

A single item is sold for more than £6,000.
Items forming a matching set (e.g., books by the same author, chess pieces, or a set of ornaments) are sold.

In such cases, special rules apply to calculating the taxable gain, and sellers may need to report the gain on their tax return.

When Selling Online Becomes a Business (Trading)

If you buy or make items with the intention of selling them for a profit, HMRC may consider you to be trading. Examples include:

Buying and reselling items at a higher price.
Upcycling furniture and selling it for profit.
Creating handmade goods and selling them on Etsy or eBay.
Dropshipping (selling items without holding stock).

Additionally, service-based side hustles are considered taxable if they involve:

Freelancing or gig work (e.g., tutoring, graphic design, content creation).
Providing local services such as dog walking, gardening, food delivery, or babysitting.
Renting out equipment or hiring services.

Once an individual is engaged in these activities with a view to making a profit, they may be considered self-employed and must report their earnings to HMRC.

Tax-Free Allowance for Side Hustles

The UK tax system provides some relief for individuals earning small amounts from side hustles.

The £1,000 Trading Allowance

If gross income from self-employment (or casual sales) is less than £1,000 per year, it does not need to be reported to HMRC.
If income exceeds £1,000, taxpayers can either:
- Deduct the £1,000 allowance from their total income.
- Deduct actual expenses incurred in running the side hustle.

Example:

If you sell handmade candles and earn £900 per year, you do not need to report this income.
If you earn £1,500 per year, you can either:
- Pay tax on £500 (£1,500 – £1,000 allowance).
- Deduct business expenses (e.g., materials, packaging, shipping costs) if they exceed £1,000.

National Insurance Contributions (NICs)

If profit exceeds £12,570 per year, Class 2 and Class 4 NICs will also be due.

VAT Considerations

If total sales (from all business activities) exceed £90,000 per year, the seller must register for VAT.
VAT-registered businesses charge VAT on sales and can reclaim VAT on purchases.

Even if turnover is below £90,000, voluntary VAT registration might be beneficial if significant expenses are incurred.

HMRC Reporting and Online Marketplace Data Sharing

Since 1 January 2024, online marketplaces are required to collect data on sellers and report this information to HMRC.

When Will Marketplaces Report Your Sales?

If there are more than 30 transactions per year and sales exceed €2,000 (£1,700), the platform must report this to HMRC.
HMRC will cross-check tax returns against this data to identify unreported income.

This means casual sellers may not receive immediate scrutiny, but those regularly selling for profit must declare income correctly to avoid penalties.

How Sellers Benefit From This Change

Marketplaces are obliged to provide sellers with copies of their reported data, making it easier to track sales for tax purposes.

What Happens If You Don’t Declare Income?

Failing to report taxable income can result in:

Interest on unpaid tax.
Penalties for non-compliance (up to 100% of the unpaid tax).
Investigations by HMRC, especially if flagged by an online platform.

It is crucial to keep accurate records of income and expenses to ensure compliance.

How to Stay Tax Compliant with Your Side Hustle

To avoid tax issues, side hustlers should:

Track all income and expenses using spreadsheets or accounting software.
Register with HMRC if income exceeds £1,000 per year.
Decide whether to use the £1,000 trading allowance or deduct actual expenses.
File a Self-Assessment tax return by 31 January each year (if required).
Monitor total sales for VAT registration if approaching £90,000 turnover.
Check reports from online marketplaces to ensure they match tax returns.

Conclusion

A side hustle can be an excellent way to earn extra money, but it comes with tax responsibilities. If you are selling online or offering services, it is essential to understand when and how tax applies.

Casual sales of personal items are not taxable (unless over £6,000 per item).
Trading income over £1,000 per year must be reported.
VAT registration is required if turnover exceeds £90,000.
Online marketplaces now report seller earnings to HMRC.

By keeping accurate records and staying informed about tax obligations, side hustlers can avoid penalties and manage their taxes efficiently.

Need Help with Your Taxes?

Merranti Accounting provides expert tax guidance for small businesses and self-employed individuals. If you need help understanding your tax obligations, contact us today for a consultation.