Can I Offset the Costs of a Side Hustle Against My Main Business?

It’s a familiar story.

You’re running a perfectly healthy creative business — an agency, freelance practice or consultancy — and alongside that you start tinkering with something new.

Maybe you’re:

• Building an AI tool to automate part of your workflow

• Creating an online course or membership

• Developing a SaaS product for your industry

• Writing a paid newsletter or resource library

Before long, real money is going out of the door:
software subscriptions, developer costs, hosting, branding, ads, maybe even contractors.

The obvious question follows:

Can I offset those costs against the profits of my main business?

The answer is: sometimes yes, sometimes no — and it depends on how the activity fits with your existing business and your legal structure.

Let’s break it down.

The Core Question HMRC Cares About

Whether you’re a sole trader or running a limited company, HMRC is really asking one thing:

Is this new activity part and parcel of the existing trade, or is it a separate trade altogether?

That single distinction drives everything:

• Whether losses can be offset

• Whether costs reduce your main tax bill

• Whether profits need to be looked at separately

Sole Traders: One Business or Two?

When it’s Usually Fine to Treat It as One Business

For sole traders, HMRC is often fairly relaxed where the side hustle is closely connected to what you already do.

Examples:

• A freelance designer creating a paid design course

• A consultant building an AI tool that supports or extends their core service

• A content creator launching paid templates or resources

If the new activity:

• Uses the same skills

• Targets the same audience

• Supports or enhances the existing business

…then it’s often reasonable to treat it as one single trade.

In that case:

• The costs of building the AI tool or course are just business expenses

• Early losses can reduce the overall taxable profit

• There’s no artificial split required

From a tax point of view, it’s all just one self-employed business evolving over time.

When It Starts to Look Like a Separate Trade

Things get trickier when the side hustle starts to diverge.

Red flags include:

• A completely different customer base

• Very different activities (e.g. a photographer starting a fitness app)

• Separate branding, websites or marketing strategies

• A clear intention to sell or spin it out later

In those cases, HMRC may see this as a separate trade, even if you personally run both.

If it is a separate trade:

• Losses may still be claimable, but under specific loss-relief rules

• HMRC may expect separate tracking of income and costs

• You can’t automatically offset everything without thought

This doesn’t mean it’s “wrong” — just that it needs handling carefully.

The Hobby Loss Problem

There’s also one important warning for sole traders.

If the side hustle:

• Never makes money

• Has no realistic prospect of profit

• Looks more like experimentation than a business

HMRC can argue it’s not a trade at all.

In that situation:

• Loss relief can be restricted

• Costs may not be fully deductible

This is especially relevant for passion projects that might turn commercial “one day”.

Intent matters.

Limited Companies: Different Rules, Different Risks

For limited companies, the analysis shifts slightly.

A company can only deduct costs that are:

Wholly and exclusively for the purposes of its trade

So the question becomes:

Is the AI tool or course genuinely part of what the company does?

When It Can Sit Inside the Same Company

If your company:

• Already operates in a related space

• Is developing the tool or course as an extension of its services

• Intends to monetise it within the same business

…then development costs are often fine to deduct:

• Software

• Contractors

• Hosting

• Marketing

• Prototyping

Early losses just reduce the company’s overall taxable profit.

This is very common with:

• Agencies building internal tools they later commercialise

• Consultants productising their knowledge

• Creative businesses launching digital products

When It Starts to Get Awkward

Problems arise when:

• The project is speculative and long-term

• It’s not clearly linked to the company’s existing activity

• The intention is to spin it out into a new company later

HMRC may start to question:

• Whether the costs really belong in the trading company

• Whether some costs are capital rather than revenue

• Whether R&D rules apply (which brings a whole extra layer of complexity)

This is often the point where setting up a separate company becomes worth considering — not always for tax savings, but for:

• Risk management

• Cleaner accounting

• Future investment or sale

Ring-Fencing: When and Why It Happens

“Ring-fencing” isn’t something you elect — it’s something that happens when activities are clearly separate.

You’re more likely to see it where:

• The side hustle is fundamentally different

• There are long periods of losses

• The commercial rationale is unclear

When ring-fenced:

• Losses can’t automatically offset other profits

• HMRC expects clearer separation and justification

This doesn’t mean you’ve done anything wrong — but it does mean planning ahead matters.

The Practical Takeaway

There’s no automatic rule that says:

“Side hustle costs must be kept separate”

Equally, there’s no blanket permission to:

“Offset everything against your main business forever”

The reality sits in the grey middle.

For many creative businesses:

• Side projects evolve naturally from the core business

• Treating them as part of the same trade is perfectly reasonable

• Problems only arise when things drift without a clear plan

A Final Thought

Before you spend serious money on:

• Developers

• Platforms

• Long-term subscriptions

…it’s worth asking one simple question:

Is this an extension of what my business already does, or the start of something new?

The tax treatment flows from that — not the other way around.

If you get it right early, you avoid:

• Disallowed costs

• Awkward HMRC questions

• Restructuring later under pressure

And if you’re unsure, this is exactly the kind of thing that’s cheaper to discuss before the money goes out the door.