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Do I Need to Pay Tax on My Hobby Side Business?

Pay Tax on My Hobby

Have you just had the epiphany: what if you could make money from your hobby? Good news, plenty of businesses and side projects are born out of simple hobbies and interests.

Starting a side business based on a hobby is a good way to test out whether the entrepreneurial life is for you and whether your hobby is profitable.

However, doing something you love as a business is a completely different experience than doing it for fun.

You’ll need to think of profit, expenses, tax, marketing and admin on top of whatever you’re planning to sell.

But if you’re serious about giving this a shot, we’re here to offer you some advice.

First of all, you need to make sure what you’re doing is legal and tax compliant.

Do you need to pay tax as a side business?

If you’re selling things as a one-off, you probably won’t need to declare your income to HMRC as it’s not really a business.

However, if your motive is to sell things to make a profit, or your sales are consistent or ongoing, you may need to pay tax on what you sell.

Tax free allowance

The good news is that what you earn on the side could be subject to tax relief.

In April last year, HMRC introduced a new allowance to cover “self-starters” with small, hobby-based businesses. The allowance means that the first £1,000 you earn (gross, before expenses) is tax free. You don’t have to pay anything on this income or even report it. There is also a £1,000 allowance for property income for those who let out rooms or homes.

If you earn more than the tax free allowance, you will need to register for Self Assessment and pay tax on any profits. You’ve got two choices from then on:

  • You can either deduct the £1,000 from your gross income and pay tax on the remaining
  • Or you can deduct allowable expenses from your gross income, like businesses usually do

Log all transactions

When you start to do regular work it’s important to log all your transactions down so that your income and therefore tax, is clear and accurate.

With modern bookkeeping software like Pandle, this is as easy as linking up your bank account as transactions will be pulled over automatically. We would recommend opening a separate business bank account which will make it much easier to differentiate between business and personal transactions. This will also help you to…

Claim your expenses

When you start to pay tax, you can reduce your tax bill by claiming for expenses. A percentage of your profits will be taxed (usually by 20%) but if you’re spending some of that profit back on the business, it’s not considered profit in the eyes of HMRC.

You can deduct the amount you spend on expenses from your profit figures and therefore reduce the amount you’ll owe in tax.

E.g. if you’re a hairdresser and charge £20 to colour someone’s hair but spent £5 on buying the dye, then you should be paying 20% income tax on £15 (£3 tax) rather than the full £20 (£4 tax).

Sole trader or limited company

When you do register as self-employed with HMRC, you will need to decide whether you want to operate as a sole trader or a limited company.

Tax returns can be simpler if you’re a sole trader with a small operation. This will suit most hobby-based businesses. However, some people prefer the limited liability of a limited company in the case of debts going wrong, and the ability to nominate multiple shareholders and pay dividends.

You can take a look at our guides on becoming a sole trader or a limited company to see which one suits you best on our resources page.

Get help

We would always recommend seeking a professional to handle your tax affairs for peace of mind and to free up your time from navigating accounts and tax law. An accountant can help you become tax compliant and also tax efficient so you can save some money.

If you would like specialist advice and for someone to manage your accounts, get a free quote from us today to see how much time, stress and money you could save.

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