As we highlighted in a recent post, new rules came into force on the 1st January 2024 which are designed to clamp down on those that are not paying the required tax on side hustles, in which they earn in excess of £1,000.00 per annum. The first £1,000.00 (the tax-free trading allowance) is regarded as “casual or miscellaneous” income.
Side Hustles
Side hustles are any type of employment or business venture that a person engages in, in addition to their primary job or source of income.
Under the new rules, platforms such as Airbnb, Etsy, eBay, and Amazon are now required by law to report users earnings, bank account details, and tax ID to HMRC, which HMRC can then compare with self assessments to check for discrepancies.
However, as we highlighted in a recent article, with taxes at a 70 year high (37% of national income – the highest since the 1940’s) and with the UK forecast to have the lowest level of GDP growth amongst the G7 in 2024 (a feeble 0.6%), Government policy has reduced the economy to a complete shambles. Indeed, on Thursday 15th February 2024, if, as many fear, it is announced that GDP fell for a second consecutive quarter, then the UK will have formally entered a recession.
Whereas most economists with a iota of common sense have been calling for a set of policies to boost economic growth in order to place the UK economy back on the right track, this Government has instead pursued a failed policy of austerity and tax hikes which for all intents and purposes have completely crushed the economy to the point where the UK is now on the brink of recession. Even if a technical recession is avoided on Thursday, the fact remains that the economy has at best stalled.
Furthermore, in its relentless pursuit of austerity, the Government has not only hiked taxes to a 70 year high, but it has done so in many ways that have been extremely unfair. As we highlighted in another recent article, one group that has suffered more than most have been contractors who are subject to the appalling 2017 and 2021 IR35 changes. Not only are they now required to pay the same rates of Income Tax and National Insurance as employees, but without having any actual employment rights, but they are also often subject to double taxation where the notoriously defective check employment status for tax (CEST) tool has not surprisingly deleivered an incorrect status determination.
However, another group that are arguably victims of unfair additional taxes are those who are using their initiative and engaging in side hustles to earn a little bit more money to make ends meet, so as to survive the cost of living crisis.
Those engaging in side hustles are already paying their fair share of taxes on their main job. So that begs the question: should those with side hustles really have to pay yet more taxes?
Many of those with side hustles are often already working full-time hours on low wages, often minimum wage. They are having to takes on side hustles to earn additional money to survive, putting in extra hours, often at the expense of their health. The fact that they are then taxed on that, means that they then have to work yet more hours to make up for that loss. Is that really fair?
So what are the arguments for and against making side hustles tax-exempt?
The Arguments For a Tax Exemption
Some of the main arguments in favour of making side hustles tax-exempt are as follows:
Promoting Financial Security and Flexibility
Many individuals, particularly those with low incomes, engage in side hustles to supplement their primary source of income and enhance their financial situation. If these side hustles were made tax-exempt, it would provide them with better financial stability and flexibility by enabling them to retain more of their earnings. This can help reduce their financial burden and offer a safety net, particularly during times of economic unpredictability.
Encouraging Entrepreneurship and Economic Growth
Side hustles often constitute entrepreneurial ventures and small businesses. Making them tax-exempt would encourage more individuals to start their own businesses, which in turn would boost economic growth. It would promote innovation and competition, as individuals would have more financial resources to invest in their side hustles. Indeed, in all likelihood, the tax lost by making side hustles tax-exempt would be more than made up through the additional economic growth generated.
Fostering Job Creation and Employment Opportunities
Side hustles often lead to job creation, either directly or indirectly. By exempting side hustles from taxes, individuals would have more financial resources to hire employees or invest in equipment and infrastructure for their ventures. This would stimulate job growth and create employment opportunities, benefiting both the individual and the wider community. Again, in all likelihood, the tax lost by making side hustles tax-exempt would be more than made up by the tax generated through the extra employment opportunities generated.
Simplifying The Tax System And Reducing The Administrative Burden
The current taxation system is, to say the least, complex and burdensome. Exempting side hustles from taxes would simplify the tax code and reduce paperwork and compliance costs for both individuals and the government. It would free up resources that could be redirected towards more productive activities.
The Arguments Against A Tax Exemption
The main arguments against a tax exemption for side hustles are as follows:-
Revenue Loss
Exempting side hustles from taxes would result in a decrease in tax revenue for the government. This could impact public services and infrastructure investment.
Equity Concerns
Tax exemptions for side hustles may disproportionately benefit higher-income individuals who have the means to start a side business. This could exacerbate existing income inequalities.
Compliance Issues
Determining eligibility for tax exemption and enforcing compliance could be challenging.
Potential for Tax Evasion
Some individuals might exploit tax exemptions for side hustles to evade taxes altogether. Proper oversight and enforcement would be crucial to prevent this.
Compromise
Making side hustles tax-exempt can have significant advantages by fostering entrepreneurship, promoting financial security for those on low incomes, creating job opportunities, and simplifying the taxation system. However, it is important to carefully consider potential drawbacks and ensure that any policy changes are equitable and effectively enforced.
One compromise would be to significantly increase the tax-free trading allowance from £1,000.00, which would particularly benefit those on low incomes who need the additional income the most to make ends meet.
