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. Learn practical, HMRC-compliant ways to reduce your tax liability whilst keeping your business financially healthy.
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 whilst 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.
Your business structure impacts how much tax you pay. The two main options for side hustlers are:
Simpler to run, lower admin, taxed at personal rates
More complex but tax-efficient if profits are high
Key insight: 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.
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.
Using a dedicated bank account for your side hustle:
Many providers offer free business banking for new small businesses.
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, first transfer the required amount from your personal account to your business account. Then, make the payment from your business account. This keeps your records tidy and demonstrates professionalism to HMRC.
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.
If you're working from home:
If you use your personal car for business:
Track all business journeys (date, purpose, miles)
45p per mile (first 10,000 miles), then 25p
This is HMRC's approved rate and avoids the need to track fuel, insurance, and repairs separately.
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 can help use up their tax-free allowance and reduce your own taxable income.
If you travel for business purposes (not your normal commute), you can claim:
Public transport fares
Business mileage
Meals when travelling
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.
If you work from home, you can claim a proportion of household costs, such as:
£10 to £26/month depending on hours worked
More accurate, based on business use percentage
You'll need to keep records to justify your claim.
If your business is profitable and you don't need to withdraw all the funds, consider making pension contributions:
Claim as a deduction from total income
Employer pension contributions are tax-deductible
This can reduce your corporation tax or income tax bill whilst saving for the future.
Using cloud-based tools like FreeAgent, QuickBooks, or Xero helps you:
Stay organised
Track income and expenses in real-time
Submit Making Tax Digital compliant VAT returns
HMRC is rolling out Making Tax Digital for Income Tax in future years. Being digital now avoids last-minute rushes.
Examples of tax-deductible expenses:
Important: Always keep receipts and only claim items that are wholly and exclusively for business.
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 whilst staying compliant with HMRC.
Taxwise Accountancy, online accountants for side hustle businesses, offers expert advice, affordable accounting packages, and full digital support for side hustlers across the UK.