Navigating a side hustle

John Carpenter at QCF explores the legal implications of developing a secondary income stream

The world of work is changing. For many of you, the traditional 9 to 5 grind is no longer the only path to financial security or personal fulfilment. Enter the side hustle: a secondary income stream pursued alongside your main job.

Whether it’s freelance writing, dog walking, or welding unique jewelry, side hustles allow people to explore passions, build skills, and potentially turn hobbies into profitable ventures.

But before diving headfirst into the world of side hustling, there are some legal issues to consider. We’ve unpacked the legal implications for businesses in the UK, so you can focus on turning your passion project into profit.

Picking your path: Different hustles, different rules

The legalities surrounding side hustles can vary depending on what you choose to do. Here’s a breakdown of some common hustles and their associated legalities: 

• Selling goods online: Platforms like Etsy, eBay, and Vinted are a haven for handcrafted goods and vintage finds. But remember, as of January 2024, these platforms report your earnings to HMRC if they exceed £1,000 in a year (more on this later!). This means registering as self-employed and filing tax returns becomes necessary when you cross that threshold.
• Freelancing: Have a knack for writing, editing, or graphic design? Freelancing allows you to leverage those skills. However, similar to online sales, income from freelancing is considered self-employment income for tax purposes. Keeping meticulous records of your income and expenses is crucial for tax filing.
• Renting out assets: Platforms like Airbnb, Hipcamp, and Vrbo can help you generate income by renting them out. Keep in mind that regulations around short-term rentals can vary by location. Check with your local council for any licensing requirements before you list your space. 

Understanding your employer’s policy

There’s no universal law stopping side hustles, but your employment contract might have a hidden clause or two. Keep an eye out for things like "conflicts of interest" or "competition." These might prevent you from working for a direct competitor or using company time to fuel your side hustle dreams.

Your employment contract may also contain clauses prohibiting you from working on any other business without the explicit permission of your employer. An open conversation with your employer is key to avoiding any misunderstandings.

Choosing your business structure

Depending on how complex your side hustle gets, you might need to choose a legal structure. The two most common structures for side hustles are:

• Sole trader: This is the easiest option, but you’re personally liable for any business debts. Great for low-risk, low-income ventures, but if you’re planning something bigger, you may want to consider forming a limited company.
• Limited company: This offers the most protection, as your business debts are protected from your personal assets, but it involves more paperwork and admin. Perfect if your side hustle is on the path to becoming a full-blown business. 

Registering your side hustle

If your side hustle takes off, you might choose to register as a limited company. This offers advantages over being a sole trader, including:

• Enhanced credibility: A limited company projects a more professional image to clients.
• Limited liability: Your personal finances are shielded from business debts.
• Tax advantages: Limited companies often have lower tax rates and flexible payout options.
• Trademark protection: Your company name becomes legally yours, preventing others from using it.

Registration can be done directly with Companies House, with an accountant, or through a formation service like Quality Company Formations, which simplifies the process for you. 

Tax implications: Keeping the taxman happy

As we touched on earlier, income from your side hustle is considered taxable income.

The good news is, you don’t have to worry about declaring side hustle income unless you earn more than £1,000 a year. This is thanks to the tax-free trading allowance.

However, if your total earnings from selling clothes reach more than £1,000 (even spread across different platforms), you’ll need to report this additional income source. It’s important to keep track of your side hustle income even if you stay below the £1,000 threshold. This way, you’ll have records readily available if needed.

Naturally, there are some exceptions to this, which include: 

• Renting out a room: You can earn up to £7,500 a year tax-free under the Rent a Room Scheme (or £3,750 if you share the income). This is much higher than the usual £1,000 tax-free allowance for side hustles.
• Selling your own belongings: In the UK, you generally don’t need to report income from selling your own personal belongings to HMRC (Her Majesty’s Revenue and Customs), as long as you are selling them for a profit that falls within the Capital Gains Tax exemption. This exemption applies to most personal possessions.
• Selling high-value items: If you make a big profit (over £6,000) selling something expensive like luxury goods or antiques, the rules change. You’ll need to tell HMRC within 60 days and may owe Capital Gains Tax instead of Income Tax. 

Owning Intellectual Property

If your side hustle includes the creation of any intellectual property (think articles, blogs, product designs etc.) then be mindful of how and when you’re working on this. Most employment contracts will contain a section on intellectual property which states that your employer will own any intellectual property created by you at any time during your employment. 

So, if, for example, you’re using your employer’s laptop, or working on your side hustle in your normal working hours, your employer may have the right to claim ownership of the intellectual property you have created. Make sure that you read your employment contract carefully to avoid these pitfalls – your intellectual property could be one of your most valuable assets. 

Getting insured

Depending on what kind of side hustle you have, you may need to get insurance. Although this may not technically be a legal requirement, insurance is recommended as a financial safety net should anything go wrong. For example, if your side hustle involves giving professional advice, you should look into professional indemnity insurance. 

Alternatively, if your side hustle includes making products; candles, soaps, etc, you may want to look into product liability insurance, to protect yourself in case your products cause your customers injury or harm. 

John Carpenter is a Director at QCF, a leading consultancy specialising in business setup and optimisation. We’re here to help you navigate the exciting world of side hustles. If you have any questions, don’t hesitate to reach out to us.

Main image courtesy of iStockPhoto.com