|
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 that 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.
Allowances
The first step is to
work out whether your earnings (from any regular work combined with extra
money-making) exceed your personal income allowance. Everyone has the right to make up
to £5,225 of income each year without paying taxes (this will rise to £5,435 in
April 2008 – the next financial year). So, if your only income is from
eBaying, babysitting or something similar, and all
the money you make doesn’t add up to more than this allowance, you do not need
to pay tax.
However, this allowance is already taken into account if you
work part-time or full-time and you are paying tax using the PAYE scheme (when
money is automatically deducted from your pay packet). So, unless your salary is
under £5,225 a year, this means that you have 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 or not so be sure to check
out exactly which allowances you are entitled to
here.
It is important to remember that income from a
pension is also taxable, so if you are 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 tax on all other earnings. However if the total of
your pension and your extra earnings is less than your allowance, you are
tax-free.
eBay
All that
seems very clear and simple, but then it gets a bit trickier. For those who use
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 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 are selling on unwanted items every now
and then, in theory you are 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 you are regularly selling large amounts of your possessions the
rules change. Again, if your profits using listing sites or classified adverts,
plus any other income/salary, do not exceed the £5,225 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 are taxable.
Regularly buying items to sell on at a profit on eBay or other sites is in effect a small business,
and so it is very important to keep a tab on profits and keep clear records,
including records of all your expenses which can be put against your profits for
taxable 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 the Revenue know within three months. Otherwise you
are liable for a £100 fine.
If you are making a tidy sum which exceeds
your personal allowance, but you still 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 the Revenue 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.
Selling your skills
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 are 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 although usually these are
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
Capital Gains Tax is only going to be relevant for you if you
are 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 does not apply to personal items worth less than £6,000, so if
you’re selling it for less then it’s not taxable. Secondly, there is a separate
annual personal allowance for CGT which is currently £9,200. This means that if
you sell items like jewellery or shares that are worth over £6,000, you are
allowed to make up to £9,200 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 and 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.
Renting
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 championship, they’ll be on to you.
Small extra earners
For those who do not earn a salary and have
been making a bit of extra cash on the side by using cash back sites and doing a
spot of mystery shopping here and there, you are probably not exceeding your
personal allowance and so you do not 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 the
Revenue informing them of what has happened (although this will probably take
longer to process).
Extra earnings and PAYE
If you usually pay your taxes using the PAYE system and would prefer not to think about all this extra
tax stuff that is indeed mightily complicated, there is something you can do to
make it all go away. By changing your PAYE code with the Revenue, your extra earnings can be taken
into account when you are taxed on your salary and so you will not 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 are earning
and then contact the Revenue who will help you sort it out. Although
it sounds great, this solution is really only effective for the minority of
cases for several 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 are
renting a property at a set rate per month/annum, this is pretty easy. However
if you are 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.
Getting started
|
