How Is Self-Employed Income From Cash In Hand Taxed?
By
HuutiMoney
If you are wondering how self-employed income from cash-in-hand is taxed, you will find the answer to this question in the following blog post; where we will discuss how and when to declare cash-in-hand income when you are self-employed as well as the consequences of not declaring cash-in-hand income for timely deduction of taxes.
How Is Self-Employed Income From Cash In Hand Taxed?
If you are self-employed, your cash-in-hand income will be taxed in the same way as your regular income. The only difference is that the first £1,000 of your cash-in-hand earnings are part of your trading allowance and are not required to be declared to the HMRC for a tax deduction.
However, cash-in-hand earnings over and above £1,000 will be part of your self-assessment form as a self-employed taxpayer in the UK. This amount will be taxed at the same rate as the rest of your income.
This means if your regular income is more than £12,570 and is taxed at 20%, the same rate will apply to your cash-in-income. Similarly, if your regular income is taxed at 40% or 45% (depending on how much your taxable income is), the same rate of income tax will apply to your cash-in-hand income as well.
How you declare cash-in-hand income to the HMRC will depend on whether it is a regular income or a casual one. Regular income is one that is part of your usual business as a self-employed taxpayer; while casual income includes earnings from a one-off job.
In the case of regular income, cash-in-hand earnings will simply be declared when you file your self-assessment form to pay your annual income tax to the HMRC. When it comes to cash-in-hand earnings from a casual income, you will need to fill in the SA1 form on the UK Government’s website and declare cash-in-hand earnings in excess of £1,000.
While declaring your cash-in-hand income as a self-employed taxpayer, you will need to remain mindful of deducting allowable expenses from your earnings so that you are not declaring a higher amount than what you’ve actually earned and are not being over-taxed.
If you receive cash-in-hand income during the 2022-23 tax year, you should register for self-assessment online by 5th October 2023 and make sure that you pay your tax for 2022-23 by 31st January 2024.
In case you have a specific question about how self-employed cash-in-hand is taxed or would simply like to speak to someone, you can contact a financial advisor to explain the process to you. There are companies such as TaxScouts that offer certain financial advisory services for free. You can share your queries with them by sending them an email at support@taxscouts.com or using the webchat function on the TaxScouts homepage.
How Can You Track Cash In Hand Income For Tax Purposes?
Since there is no digital record of cash-in-hand income and you need to make sure that the details you file during your self-assessment for tax deduction are accurate, you would need to retain physical evidence of such payments (usually in the form of receipts) and keep them safe so that they can be used during your self-assessment.
When you have cash-in-hand income as a self-employed taxpayer, you should also keep the following in mind to keep track of your income:
- You should issue invoices to maintain a record of your expenses and amounts owed by third parties.
- You should issue receipts and keep a copy with yourself to retain the proof of the transaction.
- Make digital copies of physical receipts and invoices, not only to track your income and expenses but also to have proof in case the HMRC asks you for evidence against your self-assessment.
- It will be helpful for your business if you prepare and maintain a spreadsheet of earnings to help you keep a record of amounts received and paid; as well as relevant dates.
Is Self-Employed Income From Cash In Hand Considered Legal?
Yes, self-employed income from cash-in-hand transactions is legal, as long as the recipient makes sure that they declare their cash-in-hand income to the HMRC and pay the due amount of income tax.
If someone receives cash-in-hand income and thinks that it is not due for a tax deduction or intentionally hides this income from the HMRC to avoid having to pay tax on it, they will be convicted of tax fraud when they are caught.
In such cases, there can be hefty fines levied by the HMRC, the individual will be asked to pay the collective amount of tax accumulated over the years and they can also face a prison sentence if the matter is taken to court.
Conclusion:
The above discussion helps to conclude that if you are self-employed and have cash-in-hand earnings, this income will be taxed in the same way and at the same rate of income tax as your regular income. However, the first £1,000 of cash-in-hand income is tax-free and need not be declared to the HMRC.