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There is nothing more fulfilling than making money from something you are passionate about. Nothing compares to the thrill of actually receiving money for doing something you love.
But how do you know whether you are an accidental business owner? And at what point does your hobby become a business for tax purposes?
Well, HMRC has some very specific rules and questions that you need to follow when it comes to whether or not you should be declaring your side income.
This guide is for anyone who has a hobby and receiving money for what they do, no matter how small the amount. I’ll show you the criteria for a hobby and what you need to do if you find yourself needing to go self-employed.
Hobby v Side Business
So you are doing something you love, but lately, you have found yourself receiving cash for what you do.
The main difference between a hobby and a business is that hobbies don’t attract tax and HMRC don’t need to know about what you are doing.
So the first thing you’ll need to do is figure out whether what you are doing qualifies as a hobby even though you are receiving money.
What Qualifies as a Hobby
A hobby is something you do because you enjoy it, rather than for any financial gain.
That’s people who, for example, play a musical instrument, bake cakes or make jewellery in their spare time because they enjoy it.
But let’s say the musician starts to receive money for playing at gigs or the cake baker starts to sell cakes even just to friends, their favourite past time may start being an HMRC hobby business.
HMRC Badges of Trade
The HMRC badges of trade are the technical term for a series of questions that HMRC asks to determine whether a hobby has become a business for tax purposes.
If you answer yes to any of these questions, then chances are you’re in business:
- Are you selling regularly to make an income or a profit?
- Do you buy stock and hold onto it?
- Do you make items to sell on at a profit?
- Are you planning ways to increase your income?
- Are you a registered business on Etsy, Amazon or eBay?
- Do you have a website online or a social media page where you are marketing your service or product?
- Do you buy things at wholesale to sell on?
- Are you working towards creating a brand?
If you answer no to any of these questions, then you most likely have a hobby:
- Would you be willing to provide the service or product free of charge?
- Even if you receive money, do your costs outweigh what you get paid but you choose to do it anyway?
Do I Have to Pay Tax on a Hobby Business?
Once you have figured out that you are in business, then, depending on how much you are earning you may need to pay tax.
Income tax is payable at different amounts depending on how much you are making, in total. So if you have more than one form of income, like a full-time job, you’ll need to add up your total income to work out how much extra tax you’ll need to pay on your hobby business.
How Much Can You Make Before Paying Tax?
You must start paying tax on your hobby once your income (not profit) exceeds £1,000.
HMRC launched a new tax allowance called the Trading Allowance in 2015.
It’s aimed at micro-business owners like those on Etsy, Amazon or eBay to help simplify taxes.
This allowance means that if your extra income is less than £1,000 you don’t need to tell HMRC about it.
The rules of the HMRC £1,000 Trading Allowance are very strict and using it is not always tax efficient. I’ve put together a separate guide to this allowance to help you decide whether it is right for you.
Once your income goes over £1,000 you’ll need to register as self-employed with HMRC and begin paying:
- Income tax
- Class 2 national insurance
- Class 4 National insurance
The amount of each of these that you pay depends on how much you earn once you exceed the tax-free thresholds and allowances you are entitled to.
Read More About Self-Employed Taxes
How to Declare Your Extra Income
The easiest way to declare your extra income to HMRC is to register as Self Employed, which you can do yourself online.
Once registered you’ll need to submit a personal tax return by the 31 January each year, which summarises all your income and expenses as well as telling HMRC how much extra tax you need to pay.
If you find yourself with a hobby business and need to register as self-employed and want to learn more about taxes, record-keeping and deadlines then read my Simple Guide to Going Self-Employed. I’ll help get you up and running.
Updated 3 December 2019 for Hobby Business Tax Rules UK 2019
Anita is a Chartered Accountant with over a decade of experience taking self employed business owners from financially confused to business savvy.
She is the creator of the ‘Go Self Employed’ website, which her corner on the internet where she makes self employment less terrifying.