If you are considering accepting cash in hand work, you may be wondering what the tax implications of doing so is. Well, the precise implications will depend on your personal circumstances. But if you have a full time job and have been offered some work on the side or you don’t have a job but are thinking about accepting a small job to get back into work, here is some helpful advice that may help you understand the tax implication of cash in hand work.
Does HMRC Need to Know?
You pretty much need to pay income tax on all your earnings, no matter how you earn them or are paid. If you have a job, your employer will probably be giving you a payslip which details your gross earnings and tax & NI deductions, so HMRC will be informed by your employer of the earnings. Simple, nothing extra to declare. However if you choose to do some additional work on the side for example: if you are a school teacher offering private tuition, then you will need to let HMRC know about your additional earnings and pay tax.
How Do You Let HMRC know about your extra earnings?
Firstly, you need to decide whether you have made money which you would classify as ‘Casual Earnings’ or whether you are ‘Self Employed’ because this affects how you register with HMRC and where you show your earnings on your Self Assessment Tax Return. HMRC provides some guidance to help you with this decision, but if in doubt opting for Self Employed is the safest option however you’re probably self-employed if you:
- run your business for yourself and take responsibility for its success or failure
- have several customers at the same time
- can decide how, where and when you do your work
- can hire other people at your own expense to help you or to do the work for you
- provide the main items of equipment to do your work
- are responsible for finishing any unsatisfactory work in your own time
- charge an agreed fixed price for your work
- sell goods or services to make a profit (including through websites or apps)
If You’re Self Employed
You will need to let HMRC know that you are self employed through Self Assessment by sending them a Tax Return by 31 January detailing your earnings for the previous tax year (a tax year runs from 6 April to 5 April). You can do this online here.
If You Classify Your Earnings As Casual Income
Again, you will need to complete a Self Assessment Tax Return to let HMRC know about your cash in hand earnings and you can start this process by submitting a form SA1 which you can find here.
Regardless of how you classify your income, once registration is complete you will be issued with a UTR number (Unique Taxpayers Reference). Keep hold of this reference number as it is really important as you need it to set up an online government gateway account in order to file your Self Assessment Tax Return online.
When time comes to complete your Self Assessment Tax Return you will need to declare your cash earnings within the Self Employment section of the return or the Other Income section, if your earnings are considered casual.
In both cases, you are can deduct allowable costs from your income which means anything you had to buy in order to earn the money you made. For example, if you are a hairdresser earning casual income or are self employed and you had to buy hair products, then you can deduct the cost of this from your earned income.
It’s important to keep a record of your costs, for example by keeping all your receipts, as this will reduce your taxable income and ultimately the amount of tax you have to pay.
How Much Tax Will I Pay?
Income tax is calculated at different rates according to how much you earn. So for 2017/2018 the rates are:
|Personal Allowance||Up to £11,500||0%|
|Basic rate||£11,501 to £45,000||20%|
|Higher rate||£45,001 to £150,000||40%|
|Additional rate||over £150,000||45%|
So for example if you earn £20,000 in your full time job and earn £2,000 casual income, then you will pay tax at 20% on your additional earnings (£400).
However say you earned £45,000 in your full time job an additional casual income of £2,000 would be taxed at 40% – £800.
Note: if your additional earnings is classed as self employed income you may need to pay Class 2 and Class 4 national insurance as well as income tax.
|Class||Rate for tax year 2017 to 2018|
|Class 2||£2.85 a week|
|Class 4||9% on profits between £8,164 and £45,000
2% on profits over £45,000
Find out more here.
When Do I Need to Pay the Tax to HMRC?
If you receive a payslip from your employer you will probably have noticed that an amount each month or week is being deducted for your tax and NI.
If you need to submit a Personal Tax Return under Self Assessment rules you will need to pay any tax and NI over to HMRC by 31 January each year, along with the return detailing your earnings.
The return submitted by 31 January covers the previous tax year. So for example, your tax return due on 31 January 2018 covers the tax year 6 April 2016 to 5 April 2017.
When you earn any additional money it is important to budget for any tax due and understand your true earnings, so don’t forget to set some money aside for HMRC as you get paid. If you are unsure you should definitely ask an accountant.