How to Generate Extra Passive Income

If you’ve ever wondered if it’s possible to make money whilst you’re asleep – we have good news. It is. Known as ‘passive income’ it can seem a bit too good to be true, but it is entirely possible – you just need to find the right type of passive income that works for you.

Whilst it’s often referred to as ‘easy money’, some types of passive income require a bit of hard work! It all depends on how much you want to make, and how much time you have to spare.

We’ll take a look at some popular types of passive income, and how you pay tax on it.

Types of passive income

Here are some of the most popular types of passive income, some of which you can start today.

Dropshipping

Dropshipping is a popular way to earn passive income. It’s a type of ‘retail fulfilment method’ – which basically means a way of supplying goods to customers. Some popular dropshipping websites you may be familiar with are AliExpress and The Wholesaler UK.

It can be a good side-earner because you don’t have to store the stock yourself. Once you get an order on your website, the rest is down to your manufacturer or supplier.

In that respect, finding the right manufacturer to work with can make or break your business. They’re the ones handling it all from manufacturing to fulfilment, so you have very little control over the quality of the product or the shipping experience. A bad supplier can make it extremely difficult for you to attract customers – especially if you have to spend time issuing refunds or dealing with poor reviews. It’s well worth weighing up the pros and cons, and doing your research.

Interested in dropshipping? Read more on tax and VAT for online dropshippers

Create online content

More people than ever are content creating. Whether that be through YouTube, podcasting or posting on platforms such as TikTok. This is usually referred to as ‘influencing’ where you can make money by:

Views and followers
Affiliate links
Paid partnership videos
A gifted product or experience
Ads, for example if you run a YouTube channel

Influencing can feel like a full-time role, and less ‘passive’ than some of the other options. But many creators build their audience up slowly over time.

There is huge potential to make it less passive. Let’s use GK Barry as an example. She began posting on TikTok in 2020 whilst completing a degree in film studies. Within a year of posting regular content, she surpassed 1 million followers and now hosts her own podcast.

Influencing can be mentally tough, and the money you make can fluctuate, so it’s important if you do take it up full-time you save some of your earnings for both tax and living expenses.

Want to know whether influencers pay tax? Read our guide here

Affiliate marketing

Affiliate marketing is another great way to make passive income. If you’re unfamiliar with it, it’s essentially where you promote a business’s products or services and receive commission for each sale or lead generated.

In this instance, you’ll have your own affiliate link, where you may even offer exclusive discounts to your audience.

Only partnering with businesses that align with your brand or audience is important. For instance, if you’re a finance influencer, promoting bookkeeping software may be a good call. Promoting vitamins may be a little off brand.

There are also affiliate programs you can join – for instance Amazon Associates. This is a free programme where you can earn commission by promoting Amazon products on your website through your own affiliate link. But again, it’s important to only promote things that align with your brand.

Renting out property (or your own place)

This isn’t one you can start right away, but renting out your property or room could be a major source of passive income. Many people put their home on Airbnb whilst they’re on holiday, and some even rent out their spare room on a full-time basis.

If you’re not comfortable with people in your space, and you have the budget, you could consider buying and renting out properties. This is a lot of work at first, but once you have tenants, it’ll begin to feel like more of a passive source of income.

Learn about paying tax on different kinds of property income

Print on-demand

If you’re a creative, print on demand is a perfect way of earning passive income whilst showcasing your talents. It’s similar to dropshipping, because once you’ve created your design, a supplier will then produce and ship it. You can usually choose to display it on things like clothing, home décor, or even accessories.

For example, let’s say you’ve made some art based on a popular TV show. You can have your artwork transported onto a t-shirt, mug, journal, or poster without taking a huge financial risk. Just make sure you’re not breaching any copyright or Intellectual Property rules!

Sell things you make online (or re-sell goods you own)

Opening up your own shop on Etsy or eBay is a great way to earn passive income. Whether you’re creating bespoke items, or you’re buying products to resell and make a profit. If you don’t have a business idea in mind, many people sell their old clothes on sites such as Vinted.

Selling old items can be a bit of a grey area when it comes to tax. If you’re ever unsure – speak with an accountant for more advice.

Read our guide Will I be Taxed if I Sell My Old Clothes Online?

Open an ISA

ISAs (Individual Savings Accounts) are one of the most accessible ways to earn tax-free income – if you have spare cash to put into one, of course! How you make money though, depends on the type of ISA you choose.

For example, a Cash ISA lets you save money and earn tax-free interest, whereas a Stocks and Shares ISA allows you to invest in things like shares, funds, or bonds — and any profits or dividends you earn are tax-free.

For example

Let’s say you save £2,000 in a Cash ISA with an interest rate of 2%. You’d earn £40 in interest each year — and you won’t pay any tax on it.

Alternatively, if you put that £2,000 into a Stocks and Shares ISA and your investment grows by 10%, you’d make £200 — again, completely tax-free. This is if it grows though – it’s worth noting it isn’t always a guarantee and could be seen as a risk.

There are other ISA’s too, such as Lifetime ISAs and Innovative Finance ISAs. It’s important to note you can put up to £20,000 into ISAs each year tax-free, either in one ISA or spread across multiple.

Will I need to tell HMRC about my passive income?

It depends on the type of income and how much you make. For example, if you open up a store on Etsy, and earn over the trading allowance, you’ll need to register for Self Assessment. Our guide about paying tax on side-hustles and passive income goes into more detail!

Learn more about our online accounting services for businesses. Call 020 3355 4047 to chat to the team, and get an instant online quote.