Is passive income subject to self-employment tax?

If you earn passive income as a self-employed person, you may wonder how this comes into play when you file your taxes. 

When you file your Self Assessment tax return, do you need to pay tax on this type of income? If so, how do you report it? We can answer those questions. 

This guide covers passive income for the self-employed, including:

• What is passive income? 
• Is passive income subject to self-employment tax?
• How can I track and report my passive income? 

Passive income is money you earn without active involvement. You may have put in initial work to set up a passive income opportunity. But, the money you earn continues to come in without a lot of continued effort or maintenance.

How much passive income you earn overtime may be consistent or vary from month to month. Either way, it’s an efficient way to increase your self-employed earnings. 

Here are a few common examples of passive income: 

• Rental property or equipment 
• Interest from loans 
• Digital sales (like templates, calendars, or stock photos) 
• Royalties from entertainment 
• Investing and dividends
• Ebook sales 
• Monetised blog or Youtube 

Passive income is a great way to supplement your self-employed earnings. You can keep earning from it without spending too much time or money once you set it up. With that said, passive income ventures often take startup investments.

For example, say you run a graphic design business. You might create YouTube videos to promote your business and build a following. 

But if you also monetise your YouTube as you grow subscribers, that can offer another source of income for your business. 

If you earn this type of money or hope to pursue it, it’s important to know how it’s taxed.

The simple answer is yes, passive income is subject to self-employment tax. Passive income counts as part of your taxable income as a self-employed person. 

If you earn passive income as a side job while you’re primarily employed, you don’t have to pay tax on the first £1,000 you make. This is also known as a ‘trading allowance’.

For those who are primarily self-employed, the HMRC established a personal allowance of £12,750, which is income you don’t have to pay tax on. You can subtract this from your overall earnings to determine your taxable income. 

Say you earn £30,000 in self-employed earnings and £10,000 in passive income. Together, that’s £40,000 to report, £27,250 of which will be taxed. 

Here are the tax rates you’ll fall into depending on your income: 

• Anything under £12,750 – 0% tax 
• £12,751 to £50,270 – 20% tax 
• £50,271 to £150,000 – 40%
• Anything over £150,000 – 45%

You may be able to legally reduce the tax you owe on some of your passive income if you choose to invest it into an Individual Savings Account. 

Also, if you earn dividends from company shares but it remains under the dividend allowance of £2,000, it won’t acquire tax. 

Learn more about what income is tax-free here.

Since passive income is taxable, it’s important to track and record it correctly. 

If you fail to report passive income to the HMRC, you could face penalties. With clear records and practices, you can maintain accuracy with your tax reporting.  

You must track and record your passive income, and include this in your bookkeeping. So, create a system to calculate how much you earn from this venture each month. 

For example, you might earn money from a rental property. Keep records of the rental payments you receive and any money you spend on fixing up or running the property.

If your passive income is directly related to your self-employed services, you could include this income in the business’s books. 

Say you offer tutoring services and earn passive income from ebook sales on topics you tutor. In that case, track the money you earn and include as earned income for your tutoring business.  

Set aside time each month to look over your income records. Doing so will help you catch any mistakes or omissions to increase your accuracy. 

When you fill out your Self Assessment tax return, calculate and report your total passive earnings. 

If this income is a separate business from your self-employed services, you may need to register it and fill out a different page on the tax return. 

Additionally, reporting your passive income may require supplementary pages, such as the SA105, which you learn more about here. 

Tracking your business finances may feel like a lot of work. But there are accounting tools like Countingup that can simplify the process. 

Countingup is the business current account and accounting software in one app. It automates time-consuming bookkeeping admin for thousands of self-employed people across the UK. 

With this tool, you’ll better manage your self-employed tax processes to increase accuracy and reduce stress. This app offers great features like:

• Year-round tax estimates to avoid surprises and help you plan
• Ongoing cash flow insights to track what you earn and spend 
• Making Tax Digital compliance that lets you easily share your financial data with your accountant

Save yourself hours of accounting admin so you can focus on growing your business. 

Start your three-month free trial today. 

Now that you know that passive income is subject to self-employment tax, you can use this guide to make the most of your money while staying compliant. 

If you keep accurate records of how much you earn passively, you won’t have to worry about penalties from the HMRC. 

Next, you might want to learn more about improving your self-employed tax processes. Check out our other accounting and tax articles, like: 

• What taxes does a self-employed person pay?
• How to improve your accounting skills 

When to hire an accountant for taxes