WHEN DOES HOBBY INCOME BECOME A BUSINESS FOR TAX PURPOSES?

DO I NEED TO PAY TAX ON MY HOBBY EARNINGS?

The good news is that not all of your side gig earnings are subject to tax, and you might not even have to tell HMRC about them. If your total earnings for the year on your hobby business are below £1000, they are not subject to any tax. The trading allowance allows you to earn up to £1000 a year before you need to register for self-assessment and have to start declaring your income to HMRC.

The trading allowance applies to any income earned by your side business during the tax year, which runs from 6th April to 5th April the following year. If your income stays below £1000 for this period, you do not need to do anything; however, if it surpasses £1000 by even a tiny amount, you will need to register for self-assessment.

Importantly you must remember that the £1000 allowance applies to you, not the business. By this, we mean that if you sell custom painted mugs on eBay and then run a side business making websites, the allowance applies to both sets of earnings, not just one of them. Under tax regulations, unless one of them is a registered Limited Company, you are the business, not the revenue streams, so the allowance applies to you.

WHAT HAPPENS ONCE MY HOBBY BECOMES A BUSINESS?

Once your hobby income exceeds £1000 per year in the eyes of HMRC, it is now a business. At this point, you will need to register for self-assessment and as a sole trader with HMRC.

The good news is that once you are registered for Self-Assessment, there are allowances to consider, and not all your income will be subject to tax. It is always advisable to speak to an accountant who will be able to run you through the process and also advise on things such as:

It is probably worth mentioning that if your hobby business begins to earn more money, it could be worth considering converting it into a limited company, both from a tax efficiency perspective and a legal one.

TIPS FOR TURNING YOUR HOBBY INTO INCOME

Doing something you love as a business is entirely different from doing it for fun. Running a business means considering profitability, expenses, tax, marketing and admin on top of whatever you’re planning to sell.

Getting into good habits from the start will save you headaches further down the line, things like:

  • Good bookkeeping habits – keep a log of all your business-related transactions both in and out.
  • Try to keep your hobby income separated from personal income; it makes it easier to keep track of for tax.

WHEN TO GET HELP FROM A QUALIFIED ACCOUNTANT

If you are running a new start-up or hobby business, it can be tempting to skip on formalities such as hiring an accountant, which can be costly. A good accountant will be able to ensure your income is protected and apply the proper tax allowances ensuring you keep more of your hard-earned cash while remaining compliant.

Here at RJF Accounting, we offer a wide range of services from VAT to payroll and everything in between. If you are struggling with your business’s expenses, why not speak to us today?