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 hustle income.
This guide is an introduction to the Hobby Business Tax Rules in the UK, the criteria HMRC use to decide whether someone is a hobbyist or in business (no matter how small the amount of money they receive) and what you need to do if you find yourself needing to go self-employed.
Updated 16 June 2021
Table of contents
1. Hobby or Business?
So you are doing something you love, but lately, you have found yourself receiving cash for what you do. Amazing! 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.
2. What Does HMRC Consider 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 become a business for tax purposes being.
3. When Does a Hobby Become a Business for Tax Purposes?
HMRC uses what is known as the ‘badges of trade’ to decide whether a hobby has become a business for tax purposes. These are a series of questions that HMRC asks to determine the reason behind why someone is receiving an income from what they are doing. These questions include:
- Is there an intention to make a profit?
- Are there systematic transactions?
- Was the product repaired or modified so that it would sell quicker?
You can read the full list of question HMRC ask in this guide to the badges of trade. Although answering these questions doesn’t necessarily provide a definitive answer, it can be a helpful way to decide whether you have a hobby or a business.
4. Do I Have to Pay Tax on a Hobby Business?
Hobby businesses are subject to tax just like any other business. After all, if you are making money, then HMRC want to make some money too. The amount and type of tax you pay depends on the business structure you choose to run your business.
5. How to Declare Your Hobby Business Income to HMRC
The quickest and easiest way to declare your Hobby Business Income to HMRC is to register as self employed, which you can do yourself online.
You must do this once your hobby income (not profit) exceeds £1,000, this is called the ‘trading allowance’. HMRC launched this tax allowance in 2015, 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 but you must keep a record of your earnings to prove you are eligible.
6. How to Pay Tax When You’re Self Employed in the UK
Once your income exceeds £1,000, you can choose to register as self-employed. Once the registration process is complete and you’ve received your UTR number, you’ll need to submit a tax return by 31 January each year, summarising all your income and expenses so HMRC can calculate how much extra tax you need to pay.
Self-employed individual pay the following types of tax:
The amount of each of these you pay depends on how much you earn once you exceed the tax-free thresholds and allowances you are entitled to. You can read this guide to self-employed tax where I go into this tax and share examples of how these taxes are calculated (including if you are employed and self-employed).