What Expenses a Side Hustler Can Legitimately Claim

Introduction: The Distinction Between a Hobby and a Trade

Before you can claim a single penny in expenses, you must satisfy the fundamental criteria for trading.

HM Revenue & Customs (HMRC) does not allow you to claim expenses against a hobby; you can only claim expenses against a trade designed to generate profit.

This distinction is governed by the "Badges of Trade." If you buy and sell goods frequently with the intention of making a profit, you are likely trading.

If you occasionally sell an old bike on eBay, you are not.

Once you have determined you are trading, the expenses you claim must be "wholly and exclusively" for the purpose of your business.

This is the golden rule of UK tax deduction.

If an expense has a dual purpose—part personal, part business—you must apportion it accurately or risk rejection during an enquiry.

The Trading Allowance: The First Decision Point

For many side hustlers, the simplest option is the Trading Allowance.

Introduced in 2017, this allows you to earn up to £1,000 in gross turnover (total sales before expenses) in a tax year without telling HMRC or paying tax.

However, this creates a specific trade-off regarding expenses.

If you use the Trading Allowance, you cannot deduct any actual expenses.

You simply knock £1,000 off your turnover (or the full amount if you earned less).

This is beneficial if your actual expenses are low—for example, a freelancer working from a laptop who has few overheads.

However, if your side hustle involves buying stock, driving significant miles, or using expensive equipment, claiming actual expenses will likely result in a lower tax bill than taking the flat £1,000 allowance.

You must choose one method per tax year; you cannot switch mid-year or combine them.

If your turnover exceeds £1,000, you must register for Self Assessment.

You can still choose to claim the £1,000 allowance instead of actual expenses, but you are legally required to submit a tax return.

If your turnover is below £1,000, you do not need to register or file, provided the income is not from a company you own or employ staff.

The "Wholly and Exclusively" Test

Section 34 of the Income Tax (Trading and Other Income) Act 2005 dictates that an expense is only allowable if it is incurred "wholly and exclusively" for the purposes of the trade.

This is where most side hustlers make errors.

If you buy a suit to wear for client meetings, you cannot claim it because the suit also provides warmth and decency in your personal life—it has a dual purpose.

However, if you buy a specific costume for a performance or branded safety boots for a construction gig, these are allowable because they are not suitable for everyday personal wear.

HMRC inspectors look closely at expenses that could easily be personal treats disguised as business costs.

Motor Vehicles and Mileage vs.

Actual Costs

Transport is often the largest expense for a side hustler.

In the UK, you have two methods to calculate vehicle costs: the Simplified Mileage rate or Actual Costs.

You cannot mix and match.

The Simplified Mileage rate is usually the superior choice for side hustlers because it requires significantly less administration.

You simply record your business miles and multiply by the approved rate.

For cars and vans, the rate is 45p per mile for the first 10,000 miles in a tax year, dropping to 25p per mile thereafter.

Motorcycles attract a rate of 24p per mile.

This rate covers fuel, insurance, road tax, servicing, and depreciation.

You cannot claim parking or tolls separately if using the mileage rate; they are considered included.

If you choose Actual Costs, you must keep every receipt for fuel, insurance, repairs, and MOTs.

You must also calculate the capital allowance (writing down allowance) on the vehicle's value.

Crucially, you must keep a log of total miles driven versus business miles to calculate the business percentage.

If you use your car 80% for personal use and 20% for business, you can only claim 20% of the costs.

This method often yields a lower deduction for older, low-value cars but may be better for brand new, expensive vehicles with high maintenance.

Once you choose a method for a specific vehicle, you generally stick with it for the life of that vehicle.

Working from Home: The Dual Purpose Trap

Claiming home expenses is fraught with difficulty because your home is primarily a domestic asset.

You cannot claim for rent or mortgage interest directly unless you have a room used exclusively for business.

If you work on the kitchen table or the sofa, you cannot claim a proportion of your rent or mortgage because the space is not used exclusively for business.

However, you can claim a proportion of running costs.

This includes council tax, electricity, gas, and water.

To do this, you must calculate a "reasonable" proportion.

A common method is to divide the total bills by the number of rooms in the house (excluding hallways and bathrooms) and then multiply by the amount of time the room is used for work.

Alternatively, HMRC offers a simplified flat-rate deduction for home working.

This is based on the hours you work from home per month.

It is a low amount—ranging from £10 to £26 per month—but it requires no calculation or evidence of bills.

For a side hustler working 20 hours a week, this is often the path of least resistance.

Note that you cannot claim this flat rate if you have a dedicated office in your home that you claim capital allowances on; you must choose one method.

Equipment, Software, and the Annual Investment Allowance

When you buy equipment for your side hustle—laptops, cameras, tools, or furniture—you are spending capital, not incurring a day-to-day expense.

In accounting terms, this is a capital expenditure.

However, the Annual Investment Allowance (AIA) allows you to deduct the full cost of these items from your profits in the year you buy them.

The current AIA limit is £1 million, which is effectively unlimited for a side hustler.

This means if you buy a £2,000 laptop for your graphic design business, you can deduct the full £2,000 from your taxable profit in that tax year.

Software subscriptions are treated as revenue expenses (day-to-day costs).

You can claim for Adobe Creative Cloud, accounting software like Xero or QuickBooks, web hosting, and domain names.

If you pay for a year upfront, you generally deduct the cost in the year paid, though strictly, accounting standards might require spreading it over the subscription period.

For a small side hustle, HMRC usually accepts the cash basis where you deduct expenses when you pay for them.

Stock and Materials

If your side hustle involves selling physical goods—crafts on Etsy, flipping cars, or dropshipping—the cost of goods sold (COGS) is your primary deduction.

This is not the same as the stock you buy.

You can only deduct the cost of stock that you have actually sold during the tax year.

If you buy 100 units of a product for £500 and sell 40 units, your deduction is £200 (40 units x £5 cost).

The remaining £300 value of stock is an asset on your balance sheet, not an expense.

This is a critical distinction that catches many new traders out.

You cannot deduct the entire cost of your initial stock purchase in year one if you haven't sold it all.

Training and Education

You can claim for training, but strictly only if it updates existing skills or is necessary to keep your current business running.

If you are a web designer, you can claim for a course on a new coding language.

However, you cannot claim for training that provides you with a new qualification or opens a new trade.

If you are currently a driver and you pay for a course to become a plumber, that is "capital" expenditure for a new career and is not deductible against your driving income.

This rule is strictly enforced.

Once you are established as a plumber, subsequent training to update your plumbing skills becomes deductible.

Bank Charges and Finance Costs

It is highly recommended to open a separate bank account for your side hustle, even if it is just a second current account.

Bank charges for this account are fully deductible.

If you use a personal account, you can only claim the specific transaction fees related to business, which are often zero on standard accounts.

If you buy equipment on a hire purchase or lease, the interest element is a deductible expense, and the capital element is treated under capital allowances.

For those operating as a sole trader, loan interest paid for business purposes is deductible, but if the loan is for a car that also has personal use, the interest must be restricted by the percentage of personal use.

Marketing and Professional Fees

Advertising costs are fully allowable.

This includes Facebook Ads, Google Ads, business cards, and listing fees on platforms like Etsy or eBay.

If you pay a subscription to a platform to access work (such as some freelancing sites that charge a membership fee), this is deductible.

Professional fees for an accountant to prepare your Self Assessment are deductible.

However, you cannot claim the cost of your own personal tax return filing if you do it yourself—your time has no deductible cost.

Legal fees for drawing up contracts or debt collection are deductible, but legal fees for purchasing a property or long-term asset are capital expenditure and are added to the cost of the asset.

The Cash Basis vs.

Traditional Accounting

Most side hustlers will automatically use the "Cash Basis" scheme.

Under this scheme, you pay tax on money received in the tax year and deduct expenses paid in the tax year.

It is simple and aligns with your bank statements.

The traditional "Accruals Basis" is more complex; you pay tax on money invoiced (even if not yet paid) and deduct expenses incurred (even if not yet paid).

The Cash Basis is available to unincorporated businesses with a turnover of £150,000 or less.

If your side hustle grows beyond this, you must switch to traditional accounting.

The Cash Basis has limitations: you cannot claim a loss relief against other income as easily as you can under the accruals basis, and loan interest is restricted to £500.

National Insurance Implications

Expenses affect your taxable profit, which in turn affects your National Insurance (NI) liability.

If your side hustle profit is below the Small Profits Threshold (currently £6,725 for 2023/24), you do not have to pay Class 2 National Insurance, and Class 4 NI is not due.

However, maximizing your expenses to lower your profit below this threshold has a trade-off: it may impact your eligibility for the State Pension and contributory benefits.

If your profits are low, you can choose to pay Class 2 NI voluntarily to protect your National Insurance record.

This is a strategic decision: pay a small amount of NI now to secure the State Pension later, or save the cash now and risk a gap in your record.

Record Keeping: What You Must Keep

You must keep records for 5 years after the 31 January submission deadline of the relevant tax year.

This means if you file your 2023/24 return in January 2024, you must keep the records until January 2029.

HMRC can open an enquiry into your return up to 12 months after the deadline, but if they suspect fraud or careless behaviour, they can go back up to 20 years.

You do not need to send receipts with your tax return, but you must have them available if asked.

A digital copy (photo or PDF) is acceptable.

You must record the date, amount, and business purpose of every expense.

If you cannot prove the expense was for business, HMRC will disallow it.

Common Expenses Checklist

Use the following checklist to verify if an expense is legitimate.

If you cannot answer "yes" to these questions, do not claim it.

• ✅ Was the expense incurred wholly and exclusively for business purposes?
• ✅ Do you have a valid receipt or invoice in your possession?
• ✅ Was the expense necessary for the trade, not just incidental?
• ✅ Is the expense revenue (day-to-day) or capital (asset)? (Claim accordingly)
• ✅ If motoring, have you recorded the business mileage accurately?
• ❌ Is the expense a "dual purpose" personal item (e.g., standard clothing)?
• ❌ Is the expense a fine or penalty?
• ❌ Is the expense for entertaining clients? (Client entertainment is never deductible)

Losses and Sideways Relief

If your expenses exceed your income, you have made a loss.

This is common in the first year of a side hustle due to start-up costs.

You can use this loss to reduce your tax bill.

Under the Cash Basis, you can usually only carry losses forward to offset against future profits from the same trade.

Under the Accruals Basis, you have more flexibility: you can set the loss against your other income (like your main employment salary) in the current or previous tax year, or against capital gains.

This is a crucial consideration.

If you make a significant loss in year one, using the Accruals Basis might allow you to claim a tax repayment from your employment income, providing vital cash flow.

The Cash Basis restricts this relief.

"Tax is not a penalty, but a contribution to the cost of the society in which the business operates.

However, a trader is entitled to arrange their affairs to ensure they pay no more tax than the law demands." — General principle of UK Tax Planning.

Registration and Filing Thresholds

You must register for Self Assessment by 5 October in your business’s second tax year.

For example, if you started your side hustle in June 2023, you must register by 5 October 2024.

The tax year runs from 6 April to 5 April.

The filing deadline for paper returns is 31 October, and for online returns, it is 31 January.

Payment is due by 31 January.

If your tax bill is over £1,000, you will likely need to make "Payments on Account"—advance payments towards next year's tax bill, each equal to 50% of your current year's bill.

This catches many side hustlers off guard; a profitable first year means you effectively pay 150% of your tax bill in January.

Conclusion: The Trade-off Between Simplicity and Accuracy

Claiming expenses is a balance between minimizing your tax liability and minimizing your administrative burden.

For a side hustler earning under £1,000, the Trading Allowance is almost always the correct choice.

For those earning more, the Simplified Mileage and Flat Rate Home deductions offer a "good enough" approximation that saves hours of record-keeping.

However, for those with high overheads, stock, or significant equipment purchases, claiming actual expenses and using the Accruals Basis (if eligible) provides a more accurate—and often more tax-efficient—picture.

The key is consistency.

Choose your method, keep your receipts, and never claim anything you cannot defend to an HMRC inspector.