What I am seeing on the page in the sidebar is the code, for example in the sidebar I put an image and text, and it is showing the code but not the image:

<img src="http://localhost:8888/silverstripe/assets/Home/_resampled/StripThumbnail-home.jpg" title="home.jpg" alt="home.jpg" class="destwidth=" />

If I look at the source of the page it shows the tags are not rendering properly:
&lt;img src="http://localhost:8888/silverstripe/assets/Home/_resampled/StripThumbnail-home.jpg" title="home.jpg" alt="home.jpg" class="destwidth=" /&gt;

Is there something I need to change in the TinyMCE? if so what would it be?

Is this something to do with the HTMLEditorField.php?

That output looks like it's being xml escaped. You mentioned that you were using $Sidebarcontent.XML before so it's possible that the template is still cached, so try flushing the page.

If it's not that, then I have no idea.