When Does A Hobby Become A Business For Tax Purposes?

If you have a hobby that you enjoy and are good at, this can often be a great way to earn some extra money on the side.

Maybe you sell things that you have made such as arts and crafts or cakes, or maybe you sing or play a musical instrument and can get paid to perform.

Whatever hobby you enjoy, a ‘side hustle’ can be useful as an extra income stream. However, it is important to understand what the tax liabilities are when you make money from your hobby.

In this blog post we will explain the UK hobby business tax rules and when you need to think about registering your hobby as a business.

Is it a hobby or a business?

The main difference between a hobby and a business is that you don’t have to pay tax on your hobbies. If you are simply doing something you love and not making any profit from it then you do not need to tell HMRC about what you are doing.

However, as soon as you start making money from your hobby (selling the cakes you bake, being paid to play your musical instrument etc.) then your hobby may be considered a business by HMRC.

HMRC have a series of questions, known as HMRC Badges of Trade, that determine whether your hobby has become a business for tax purposes.

If you answer yes to any of these questions, then it is likely that your hobby has become a business:

  • Do you regularly sell a product or service to make an income?
  • Do you make items to sell on at a profit?
  • Have you registered as business on Etsy, eBay, or Amazon?
  • Do you buy stock to hold onto?
  • Do you plan to increase your income from your hobby?
  • Do you have a website or a social media page where you market your product or service?
  • Do you buy items at wholesale to sell on for a profit?
  • Are you working towards creating a brand?

Do I need to declare income from a hobby?

The short answer is yes. If you are making money from your hobby you will need to declare it to HMRC and will be liable for the tax earned on any income received.

The amount of Income Tax payable depends on how much make in total. If you have more than one source of income, for example a full-time job with a money-making hobby on the side, you will need to add together all income to work out how much additional tax you will need to pay on your hobby business.

How much money can you earn from a hobby before paying tax?

In 2017 HMRC introduced a tax-free trading allowance for micro-business owners earning money from hobbies. This includes those selling on Etsy, eBay, and Amazon.

The tax-free trading allowance means you do not have to pay tax on the first £1,000 you earn from your hobby business.

This is good news for anyone just earning a small amount here and there from their hobby. You will not need to declare this income or pay any tax on it.

However, if you earn more than the tax-free allowance of £1,000, you are required to pay tax on any profits and complete a self-assessment tax return each year.

Do I need to register my hobby as a business?

As far as HMRC are concerned, your hobby becomes a business once your turnover exceeds the £1,000 threshold. At this point you should register for self-assessment and will have to pay Income tax, Class 2 national insurance, and Class 4 National insurance.

Being a sole trader (self-employed) is a good option for small operations with a low turnover, but if your hobby-based business becomes your main source of income, or your full-time job, you should consider setting up as a limited company.

As a limited company you will be able to claim tax allowances such as using your car for business and bringing other people on board. Trading as a limited company rather than a sole trader also means that you will benefit from limited liability protection. Should your company run into trouble, your personal assets are secure.

When starting a new business in the UK it is important to ensure you are HMRC compliant. Log all business transactions so it is easy to keep track of your income. This will make it much easier when you come to file your annual tax return.

You also need to keep track of your expenses as you will be able to claim back some of the money you have spent on your business.

If you need any help or advice on tax or setting your hobby up as a business, please get in touch with us here at Wizz Accounting.

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