Anyone who makes money through their hobbies and online sales could face tax bills and fines if they don’t get their tax affairs in order now, experts warn.
Sweeping new tax rules will be introduced on January 1 that could result in thousands of people earning a small extra income being caught by the tax office if they haven’t declared it.
Those affected include anyone who buys and sells clothing and household items via online marketplaces, sells homemade crafts or baked goods online, works as a driver or rents out a holiday home via an online platform.
Almost a third of UK workers have found ways to earn a little extra money as the cost of living crisis cuts into their income, according to a survey by comparison website money.co.uk.
Robert Salter, director of tax and accounting firm Blick Rothenberg, says: “With the new rules coming into force next January, now is a natural time to review your tax affairs and ensure there are no historical issues.”
Crackdown: New tax rules due to be introduced on January 1 could result in thousands of people earning extra income being caught by the tax office if they fail to declare it
Anyone who earns less than £1,000 from part-time jobs in a tax year will not have to pay tax or declare this income thanks to the Trading Allowance.
The Rent A Room scheme also lets you earn up to £7,500 tax-free by renting out furnished accommodation in your home.
However, if you earn even £1 more than your annual allowance, you will need to tell the tax office by either contacting HMRC and requesting a change to your tax number or by filing a self-assessment tax return.
New rules from January 1 will require digital platforms such as eBay, Uber and Airbnb to report information about their users’ income directly to HMRC.
Previously HMRC could request this data on an ad hoc basis, but from January 1st it will be provided automatically.
Additionally, from this date, digital platforms based overseas – including for holiday rentals in Europe – will have to report to HMRC on their UK-based sellers.
HMRC has committed £36.69 million, including 24 full-time staff, to enforce this new measure.
Dawn Register, head of tax dispute resolution at accounting firm BDO, says tax authorities have struggled to keep up with digital innovations in the gig economy but are now fast catching up, leaving fewer options for people who want to hide their income.
“The information will make it easier for HMRC to detect and tackle tax evasion,” she added.
“Therefore, it will be even more important for taxpayers to ensure they accurately report their income from all sources.”
Who has to pay taxes?
Although the digital platforms report income information to HMRC, it is left to the individual to declare their own income and pay any taxes due.
You only have to pay tax if you are classed as a “trader” by HMRC. This usually means buying and selling online regularly to make a profit. You can check how HMRC assesses your circumstances at gov.uk/check-additional-income-tax.
For example, if you clear out your attic and sell your unwanted items online without making a profit, it is unlikely to be classed as trading, even if you exceed your £1,000 allowance.
If you occasionally bake cakes for friends and family and they pay you small amounts as a thank you, you may not have to pay taxes on them.
However, if you often buy and sell clothes online to make a profit, you could be facing a bill.
Extra income: Almost a third of UK workers have found ways to earn some extra money as the cost of living squeezes their income
What about my historical income?
It’s not enough to start paying taxes now. “There are a lot of people who also need to clean up their story,” says Robert.
He explains that if you earned a small amount above your exemption amount, you can usually file tax returns for those years in arrears and pay the tax due.
“There is a small chance that HMRC will impose penalties, but in many cases if you contact HMRC proactively and have small bills to pay, it should be fine,” he says.
However, if you have larger amounts to declare or have filed tax returns and have not declared your additional income, you will need to make a voluntary declaration, he adds.
This is where you contact HMRC and tell them the income you have not previously disclosed. If you contact HMRC yourself you should be given a less severe penalty.
You can also help keep any fines at bay by responding promptly to any subsequent correspondence from HMRC and paying any tax due straight away.
“It may take a few months for you to receive a final tax bill from HMRC, but you could pay an estimated amount straight away as a deposit to show goodwill,” adds Robert.
You may need to fill out tax returns to declare the money you earn from your hobbies, even if you have no other income and earn less than your basic personal allowance of £12,570.
“Many people think they don’t have to file a tax return because they don’t have to pay income tax.” “But they still have to because they might get charged a Social Security bill,” says Robert.
When are the deadlines?
All income for the tax year ending 5 April this year must be reported to HMRC by 31 January next year.
Dawn added: “The new rules mean information will be collected from January 1st, so this will impact the current tax year which ends on April 5th next year.”
The sooner you notify HMRC, the better. If you file historical tax returns, you may be able to tell HMRC that you want to file them and then have three months from that date to do so.
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