Episode Transcript
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Speaker 1 (00:00):
This series is brought to you by L& G, helping
you build a future but a little bit richer.
Iona Bain (00:06):
Hello and welcome to A Little Bit Richer with me
Iona Bain, brought to you by Legal & General. Now we're
back with part two of our tax special with accountant
Tim Paul. You can go back and have a listen
to part one if you haven't already had a chance
to do so. Definitely recommend it but for now let's
dive in. Tim, are you ready?
Tim Paul (00:25):
I'm ready.
Iona Bain (00:27):
Let's go. Let's talk about side-hustles because I get asked
a lot about whether you should pay tax on your side-
hustle. What's the answer?
Tim Paul (00:36):
It depends on how much you earn. So with this the
key thing that you want to look at is something
called the trading allowance. And the trading allowance in the UK
everyone is entitled to earn up to £1, 000 a year
through side- hustles, separate income outside of what you earn
from your day- to- day salary and job. And up
to this amount you don't have to declare the income,
you don't have to pay any tax on it. Obviously
(00:57):
when you go above the £1, 000 that's where it gets a
bit more interesting. At that point you have to start
declaring it, you have have to register for self- assessment and you
have to do this within a certain date.
So let's
say you're selling clothes online, on Vinted which a lot
of people do these days, or Uber driving as a side-
hustle, if you earn above that £1, 000, let's say the current tax
year, so the tax year runs from April '25 to
(01:18):
April '26, if you earn say £ 3, 000, £4,000 in that
tax year through your side-hustles, you've gone above the trading allowance,
so what you need to do is register for self-
assessment by October 5th 2026 and then pay the applicable
tax on the self- assessment in January of 2027. That's
essentially how the process works and it will basically be
(01:39):
added on as additional income to what your salary is.
So if you earn £40, 000 from your salary and you've earned £ 4,
000 from your side- hustle you'll by paying the extra
tax as in total you've earned £ 44,000 for that tax
year. So yeah, you'll pay the 20% income tax, the 8% National
Insurance on that income that you've earned from side- hustles.
(01:59):
The key thing to remember is that obviously you can
deduct expenses so any subscriptions fees, travel costs that you've
incurred, any equipment that you've bought, stationary, even if it's
something really small like pens and notepads or books, whatever
it might be that you've used whilst doing the side-
hustle, you can obviously deduct that as an expense and
then you get to a figure that will be called
profit and then you pay the tax on that profit.
Iona Bain (02:22):
So keep the receipts.
Tim Paul (02:23):
Keep your receipts people.
Iona Bain (02:25):
And if anyone's thinking " Do I have to declare this
really? Will the taxman get to find out about it?"
what's your advice.
Tim Paul (02:32):
Well my advice is don't even think about that because
HMRC receive date from Etsy, from Airbnb, from Uber, from
all of the online platforms where people commonly earn extra income.
They get all of the data so they can see
everything. They can get access to your bank account. No
matter what it is, if you go above the threshold you unfortunately
(02:54):
have no choice but to pay the applicable tax.
Iona Bain (02:56):
Yeah. No hiding place. You've got to come clean. But
I think there has been this misperception that if you
earn any money from side-hustles, then you'll have to pay
tax on it. I think there were quite a lot
of scary headlines about this when it was reported that
HMRC would be contacting a lot of theses platforms to
get that data. But £1, 000 is quite a lot to
earn over the year especially if you're selling clothes on Vinted or
(03:19):
Depop for example. A lot of us would be really
lucky to get to that amount. So it's probably fair
to say that it's not going to affect everyone who
has a side- hustle.
Tim Paul (03:28):
No, exactly not. If you're below that threshold you don't even
have to think about it. It's just a case of
tracking what you're earning because you don't want to accidentally
go above and forget to do it. So it's just
make sure you're looking at your numbers and if you have to
pay, you have to pay.
Iona Bain (03:43):
Exactly. Stay on top of it.
Now tax- free childcare
can be a real help for so many families but
it can be lost if your income goes past a
certain level. Can you just talk us through how that works?
Tim Paul (03:55):
So there's two main benefits. So there's tax- free childcare
and there's Child Benefit. People confuse the two. We'll go
through tax- free childcare first. So that is a scheme
where for every £ 8 you put in for tax- free childcare,
its an account that you have online the government, you
then get an extra £ 2 back. So it's a 25% bonus
essentially. So if you put in £ 80 then you'll get £ 100 back,
(04:17):
an additional £ 20. That benefit will get lost once you
or your spouse is earning £100, 000 or more. It's not
combined, it's each. So if you both earned £ 99, 000
each you'd still qualify.
Iona Bain (04:32):
Oh.
Tim Paul (04:32):
Yeah, the threshold is quite high for tax- free childcare
and obviously that money that you get, the bonus, can
be put towards obviously help with costs for raising your
child or children.
Then Child Benefit is a little bit
more strict. So with Child Benefit, you get £1, 300 roughly
for your first child for the year, each year for
your first child, and then additional children you have it
(04:55):
will be about £ 800, £900 per year that you receive from the
government, again to help with childcare costs. This gets lost
or starts to get lost once you hit above £ 60,000.
Again that's either you or your partner earns £ 60,000 individually.
Once you go above that threshold you start to lost the
benefit or the amount of the childcare that you get
by 1% for every £ 100. Eventually, once you hit £80, 000
(05:18):
in income you lose the Child Benefit completely and at
that point you don't get any tax- free income though
Child Benefit from the government.
Iona Bain (05:26):
So it's worth being mindful of that especially if you
are starting to earn a decent income. Very good advice.
Okay. Let's do a quickfire round on some of the
tax thresholds. Are you ready?
Tim Paul (05:37):
I'm ready.
Iona Bain (05:38):
Great. Personal Allowance on income.
Tim Paul (05:39):
So 0 to £ 12, 570 you don't pay any Income Tax
or National Insurance.
Iona Bain (05:46):
Personal Savings Allowance?
Tim Paul (05:47):
For basic- rate taxpayers, that is £1, 000 in tax- free
interest you can earn. For higher- rate taxpayers that's £ 500
in tax- free interest and then for additional rate taxpayers,
again when you're earning £ 125, 000 plus, you don't get
any tax- free interest.
Iona Bain (06:02):
Interesting to know. Dividend Allowance?
Tim Paul (06:03):
Yes, so dividends if you are a director of a
limited company or if you invest in stocks that pay
dividends, you can earn £ 500 a year tax- free from
dividends that you don't have to declare. Above that you have
to declare.
Iona Bain (06:20):
And Capital Gains Tax Allowance?
Tim Paul (06:22):
Capital Gains Tax again, if you own shares, stocks, you
have to pay Capital Gains Tax on the sale, on
the gain that you make. So if you bought something
for £ 10,000, you sold it for £20, 000, you then have to pay Capital Gains
Tax on the gain of the £10, 000 that you make. You get a £3,
000 annual allowance so any gains you make that are
(06:44):
below £ 3000 no tax to pay and you can actually
transfer that to a spouse to make it £ 6000 in total.
Iona Bain (06:50):
I think you smashed that.
Tim Paul (06:51):
Thank you.
Iona Bain (06:51):
Its almost like you're an expert. So we've just mentioned
a few more taxes that people might have to think
about if they're saving and investing. How can we manage
these to be more tax efficient.
Tim Paul (07:03):
I thing I talk about all the time, nearly every
single content I post online is your ISA, Individual Savings
Allowance. If you don't know what that is, please go
and research what that is. It will be your best
friend from now until retiring. So what the allowance is
is £ 20,000 per tax year that you can invest and
put into your ISA. There's a few different types of ISA
(07:25):
as well. If you want to invest, there's a stocks
and shares ISA. If you just want guaranteed interest like a
normal savings account but tax- free then you'd put into
a cash ISA, and if you want to save towards
a home you'd put it into a lifetime ISA. They are the
main ones.
But it's £ 20,000 a year you can put into
this ISA, combined across all of them, and all the gains,
dividends, interest is completely tax- free. It's sheltered so the
(07:46):
government can't touch it. They can get everything else that
you earn but they can't get the gains that you
make from within your ISA. So with the benefit of
compound interest where you can earn interest year- on- year,
if you start investing from a young age then by
the time you reach 65 and retire, you can have
a huge pot of money saved up and again, all
(08:07):
of it goes to you, not a penny goes to
the taxman. So it's a huge lever that we've got
in order to mitigate tax and actually build wealth for
ourselves in this country.
Iona Bain (08:16):
And again, entirely legal.
Tim Paul (08:17):
Entirely legal.
Iona Bain (08:19):
And finally, say you own a property, you're renting out
a room to help bring in a bit of extra
cash, can you talk us though what Rental Income Tax is?
Tim Paul (08:28):
Yeah, so rental income is treated slightly differently. So there's
a scheme called The Rent a Room Scheme which means
you can essentially earn up to £ 7, 500 per year
from rental income by renting out a spare room in
your house and essentially that is all tax- free. So
regardless of whether, so you've got a side- hustle that
you've already earned £1, 000 or you've got dividends of £ 500,
(08:51):
it's a separate allowance. So regardless of the other income,
regardless of your salary or tax band, you get that £7, 500
allowance you can earn from renting out a room and
only once you go above that do you then have
to do the self- assessment, declaring the income above that
amount. But that's quite a good allowance that a lot
of people can make use of but obviously only if
you've got the spare room.
Iona Bain (09:11):
Got it. And what if you think you might have underpaid
tax? How would you go about declaring that?
Tim Paul (09:16):
If you are thinking that you've under- declared or underpaid
via self- assessment you've been earning from a side- hustle, that
will be though your self- assessment so you'll need to go online,
look up your self- assessment and make an adjustment or
declare the correct amount. Best thing to do with that
is to speak to an accountant because they can obviously
guide you though the process and fill out the form
for you. If it's through your employment you will always
(09:39):
get a letter in the post if you've underpaid your
tax so that will tell you how much you've underpaid
by, how much you need to pay, and you'll have
a link to where to go online to then pay
that. So yeah, there's not really anything that you need
to do as such, it's really only if you think
that you've overpaid, then you can go online and look that
up and see if you're due a rebate. But if you've underpaid, then
(10:01):
they will make sure that they get the money that they're owed.
Iona Bain (10:03):
Yeah, it's something that you really do need to pay attention to and
not just hope will go away because yeah, you own
that money and it needs to be paid back.
Tim Paul (10:12):
Yes.
Iona Bain (10:12):
So, before I let you go, what are your three quick
wins for people that can help them ensure that they're
not paying any more tax than they need to?
Tim Paul (10:22):
The first thing I would say is checking your tax
code. So for the majority of people this should be
1257L to reflect their personal allowance. If your code on
your payslip is anything other that 1257L and you don't
know why, then immediately you want to contact your employer
and get that sorted out. That would be the first
thing.
The second thing I would say is there's a
(10:45):
government app now. HMRC have an app. The government have
an app. Download both because what you can do is you can go
on the app and you can actually put in your
details and then it can tell you what benefits and
allowances you're entitled to
kinds of things. So it's actually a very, very good
app and it does give you all the information that
you need
(11:06):
paying, your self- assessment record, even your National Insurance Number,
everything like that. So that would be the second thing
to see what you can get.
Then the third thing is
the pensions point. Get your pension sorted. If you don't
know what pots you've got where, or if you don't
know how much you're contributing, if you don't know how
much your employer's contributing, find that out. Find out what
the pension's being invested into and make sure that you've
(11:29):
got that sorted because that is the quickest win in
order to make sure that you're not overpaying on your taxes.
Iona Bain (11:35):
Well, we're all singing from the same hymn sheet there.
Here, here. That's all fantastic advice Tim. Thank you very much.
Tim Paul (11:41):
Thank you.
Iona Bain (11:43):
Well, we hope you now feel just a wee bit
more enlightened on ways to help your finances. If this
episode has sparked a conversation you want to have with
friends or family, I would love it if you could
share the podcast and help others get a little bit
richer too.
Next time, Laura Ann Moore will be here
to show us how we can gamify our finances with
lots of great hacks that might make saving, dare I
(12:06):
say it? fun.
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