There is nothing more fulfilling than making money from something you are passionate about. After all, what really 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 fall under the hobby business tax rules in the UK? 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. I’ve outlined all the crucial information you need to understand about making money from your hobby; from the criteria HMRC uses to decide whether someone is a hobbyist or in business, no matter how small the amount of money they receive, to what you need to do if you find yourself needing to go self-employed.
Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
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. The first step you need to do is figure out whether what you are doing qualifies as HMRC hobby income, 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 doing it for any financial gain. This can include people who, for example, play a musical instrument, bake cakes or make jewellery in their spare time – they do it because they enjoy being a side hustler.
But let’s say a musician starts to receive money for playing at gigs, or the cake baker starts to sell cakes even just to friends, now their favourite pastime may become a business for tax purposes. This is when you have to seriously think about the hobby business tax rules in the UK and keep your records up to date.
3. When Does a Hobby Become a Business in the UK?
HMRC hobby income is defined by what is considered 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 questions HMRC ask in my 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?
In short, yes you do. Hobby or side hustler 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. HMRC call this the ‘trading allowance’ and they launched this tax allowance in 2017. 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. However, 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. After 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. This should summarise all your income and expenses so HMRC can calculate how much extra tax you need to pay.
Self-employed individuals pay the following types of tax:
- Income tax
- Class 2 and Class 4 National Insurance
The amount you pay for both of these depends on how much you earn once you exceed the tax-free thresholds and includes the allowances you are entitled to. You can read this guide to self-employed tax where I go into this tax issue and share examples of how these taxes are calculated (including if you are employed and self-employed).
So many businesses are launched by hobbyists and side hustlers so this sounds like you, it’s vital to follow hobby business tax rules in the UK. This will make your life so much easier when the time comes to fill in your self-assessment.