Side hustles are on the rise in the UK, driven by the cost-of-living crisis, flexible working, and the desire for multiple income streams. But if you're earning extra money on the side—whether through freelancing, online selling, or offering services—you must manage your tax obligations correctly to avoid trouble with HMRC. Fortunately, there are HMRC-compliant ways to reduce your tax liability while keeping your business financially healthy.
In this guide, we explore practical tax-saving tips for side hustle businesses, based on HMRC rules and real-world accounting experience.
1. Choose the Right Business Structure
Your business structure impacts how much tax you pay. The two main options for side hustlers are:
- Sole Trader: Simpler to run, lower admin, taxed at personal rates
- Limited Company: More complex but tax-efficient if profits are high
If your total income exceeds £50,000, trading through a limited company can reduce tax by allowing you to take a combination of salary and dividends.
Example: A sole trader earning £60,000 may pay more in Income Tax and National Insurance than a limited company director drawing £12,570 salary and the rest as dividends.
Speak to a qualified accountant to choose the best structure for your situation.
2. Open a Separate Business Bank Account
Using a dedicated bank account for your side hustle:
- Makes it easier to track income and expenses
- Simplifies your tax return and year-end accounts
- Shows HMRC you are operating as a genuine business
Many providers offer free business banking for new small businesses.
3. Pay Business Expenses from the Business Account
It’s essential to pay all business-related expenses directly from your business bank account—even if the amount is small. This helps maintain a clean audit trail and simplifies your bookkeeping and year-end accounts.
Avoid using your business account for personal spending, as this can complicate your records and raise unnecessary questions during an HMRC enquiry.
If your business bank account doesn’t have enough funds to cover a business expense, the best practice is to first transfer the required amount from your personal account to your business account. Then, make the payment from your business account. This method keeps your records tidy and clearly shows that the expense was paid through your business.
Keeping personal and business transactions separate makes your accounts easier to manage and demonstrates professionalism to HMRC.
4. Claim Tax-Free Mobile Phone Use
If you're trading through a limited company, transfer your mobile contract into the business name.
HMRC allows one tax-free mobile phone per director, even if it's used for personal reasons—as long as the contract is in the company’s name.
This is a great way to save tax on a cost you're already incurring.
5. Internet and Broadband
If you’re working from home:
- You can claim a portion of your broadband costs as a business expense
- Better yet, set up the broadband in the business name if possible
For sole traders, apportion a fair percentage (e.g. 50%) if the broadband is shared.
6. Mileage and Vehicle Expenses
If you use your personal car for business:
- Keep a log of all business journeys (date, purpose, miles)
- Claim mileage at 45p per mile for the first 10,000 miles and 25p thereafter
This is HMRC’s approved rate and avoids the need to track fuel, insurance, and repairs separately.
7. Pay a Salary to Your Spouse or Partner
If your spouse or partner helps with your business (e.g. admin, delivery, marketing), and they’re not using their personal tax allowance, consider paying them a salary.
This is allowed if:
- The work is genuine
- Payment is reasonable
- You register for PAYE if needed
This can help use up their tax-free allowance and reduce your own taxable income.
8. Travel and Subsistence
If you travel for business purposes (not your normal commute), you can claim:
- Public transport fares
- Business mileage (as above)
- Meals when away from your base
According to HMRC, travel must be "wholly and exclusively" for business. Meals can be claimed if you’re travelling for work and it’s not part of your normal routine.
9. Use of Home as Office
If you work from home, you can claim a proportion of household costs, such as:
- Rent or mortgage interest
- Council tax
- Gas, electricity, and water
- Internet and phone
HMRC offers two options:
- Flat rate (simpler method): £10 to £26/month depending on hours worked
- Apportioned actual costs: More accurate, based on business use percentage
You’ll need to keep records to justify your claim.
10. Contribute to a Pension
If your business is profitable and you don’t need to withdraw all the funds, consider making pension contributions:
- For sole traders: Claim as a deduction from total income
- For company directors: Employer pension contributions are tax-deductible
This can reduce your corporation tax or income tax bill while saving for the future.
11. Keep Digital Records and Use Accounting Software
Using cloud-based tools like FreeAgent, QuickBooks, or Xero helps you:
- Stay organised
- Track income and expenses in real-time
- Submit Making Tax Digital (MTD) compliant VAT returns
HMRC is rolling out Making Tax Digital for Income Tax in future years. Being digital now avoids last-minute rushes.
12. Don’t Forget Allowable Expenses
Examples of tax-deductible expenses:
- Office supplies
- Website costs
- Software subscriptions
- Marketing and advertising
- Training related to your business
- Professional memberships
- Accountancy fees
Always keep receipts and only claim items that are wholly and exclusively for business.
Final Thoughts
Running a side hustle is exciting and can provide real financial freedom. But as income grows, so do your tax responsibilities. With careful planning, and by using the tips above, you can reduce your tax bill legally and confidently while staying compliant with HMRC.
Need help setting up or managing your side hustle accounts? Taxwise Accountancy, online accountants for side hustle businesses offers expert advice, affordable accounting packages, and full digital support for side hustlers across the UK. Book a Free Consultation with our expert side hustle business accountants.
