People are always looking for ways to earn a bit of extra cash. Now more than ever, there’s a strong buzz around passive income, with people looking to boost their earnings without having to clock more hours.
But as with all things money, HMRC want their slice. Whether you’re renting out a spare flat, selling items on Vinted, or collecting dividends from shares, it’s essential that you keep on top of your accounts and ensure your passive income is legally compliant. Not many people realise that even if your income is passive, the accounting it involves can be incredibly demanding.
So, let’s break it all down: what passive income really is, how to report it, and how to do it tax-efficiently.
What is Passive Income?
Put simply, passive income is money you earn with little to no daily effort. Unlike your regular job or business income that requires ongoing time and energy, passive income tends to work in the background once it’s set up.
Don’t be fooled, though! It usually takes a fair bit of upfront work. Setting up a rental property, or an affiliate marketing stream, or downloadable digital content are all quite time-consuming at first. Once in place, however, the income can keep rolling in while you focus on other things.
Common Forms of Passive Income
Passive income is quite an expansive term, but some of the most popular sources we see among our clients include...
Rental Income
from letting out residential and commercial property
Royalties
from books, music, and other creative works
Dividends
from company shares you own
Affiliate Marketing
earning commissions on referred sales
Interest
earned from savings accounts or bonds
Digital Products
like courses, eBooks, templates that can be sold online
Some of these can start small, but with the right setup, they can become meaningful additions to your income.
Do I need to report Passive Income to HMRC?
Simple answer – yes!
While your passive income often feels like “just a bit on the side,” you still need to tell HMRC about it. Failing to report your earnings isn’t just risky – it’s illegal.
HMRC uses a powerful data analysis system called Connect, which pulls data from bank accounts, property transactions, online platforms, and more to check if your lifestyle matches your declared income. And spoiler alert: it works.
How do I report Passive Income?
The standard way is via Self Assessment tax returns.
Register with HMRC (if you haven't already).
Fill in the main SA100 form, plus any extra sections depending on the type of income (e.g. SA105 for rental income, SA106 for foreign income).
Submit your forms before the annual deadline (31 January for online returns).
HMRC will calculate what you owe, or you can estimate it for yourself using their guidance booklet.
Pay your taxes – typically via payments on account. In most cases, this involves paying your previous year’s tax bill in two instalments: 31 January and 31 July.
If you’re earning more than estimated, you may also have to pay a ‘balancing payment’ on top of your payments on account. If you’re earning less, you may be able to claim a tax refund.
If you’re unsure which forms you need or how to file them, this is exactly the kind of thing we help our clients with on a daily basis!
How do I handle Passive Income tax-efficiently?
Passive income is, in almost all cases, taxable. However, there are a few allowances that can soften the blow and legally save you money. After allowances, standard income tax rates apply.
Personal Allowance
Everyone gets a personal allowance of £12,570 for income that’s completely tax-free.
Trading Allowance
If you’re employed earning passive income on the side, the first £1,000 is tax-free.
Dividend Allowance
Dividends under £500 fall within the dividend allowance and are also tax-free.
ISA Allowance
You can put up to £20,000 into ISAs each year and earn tax-free interest on your savings.
Passive income is taxed like regular income, so your total earnings will determine the rate you pay. So, say you have an annual salary of £45,000, with an extra £6,000 each year from passive income, you will be bumped up a tax bracket and have to pay 40% tax.
Passive income by definition is meant to be a “hands-off” means of making cash, but as you can see, the accounting side is anything but!
Want to save yourself stress this tax year? Give us a call and let us help put the ‘passive’ back into your ‘passive income.
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