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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. You may also benefit from the tax free trading allowance.

What is the tax free trading allowance?

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. The good news is that what you earn on the side could be subject to tax relief. HMRC introduced a tax free allowance to cover “self-starters” with small, hobby-based businesses.

The trading 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.

 

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What if I earn more than the tax free allowance?

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

It’s up to you which one you choose, but you can only use one method at a time. You might want to work out which one is most tax efficient for you.

If you total all of your expenses, and they are less than the trading allowance, using your trading allowance against tax will be more beneficial.

Should I turn my hobby into a business?

Doing something you love as a business is a completely different experience to doing it for fun. Running a business means taking into consideration profitability, expenses, tax, marketing and admin, on top of whatever you’re planning to sell. Plus, if your motive is to sell things to make a profit, or your sales are consistent or ongoing, then you may need to pay tax on what you sell.

We know it sounds a bit scary, but that doesn’t mean that it’s impossible. As online accountants, we’ve put together some advice on how you can turn your hobby into an HMRC-compliant business start-up.

Log all of your business 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 simple bookkeeping software like Pandle, this is as easy as linking up your bank account as transactions will be pulled over automatically. We recommend opening a separate business bank account, too. This makes it much easier to differentiate between business and personal transactions.

 

 

Claim your allowable 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%). 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.

An example of how expenses work against tax

A hairdresser charges £20 to colour someone’s hair. The hairdresser spent £5 buying the dye. This means that the hairdresser has made £15 in profit. They will pay income tax (at 20%) on the profit. The hairdresser will therefore pay income tax on £15 (£3 tax) rather than on the full £20 (£4 tax). In some cases this difference can be really very significant!
 

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Choosing between being a sole trader or a 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 case of debts going wrong, and the ability to nominate multiple shareholders and pay dividends.

We also have guides on becoming a sole trader or a limited company to help you decide which one suits you best.

Get help from a qualified accountant

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, use the live chat button on screen, or get an instant online quote.

About The Author

Dean Salmon

I'm an AAT and ACA qualified Chartered Accountant with over 13 years experience working with businesses, contractors and sole traders. I also love watching live music, and quizzes! Learn more about Dean.

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Joe
Joe
31st August 2021 11:06 am

Can losses from a hobby be used to offset other taxable income?
I have lots of expensive hobbies…

Elizabeth Hughes
Admin
Elizabeth Hughes
31st August 2021 11:26 am
Reply to  Joe

Hi Joe

Thanks for your message! You can only claim expenses which relate to your business activities. We have a guide which goes into a bit more detail about the sort of things that you can claim for: https://www.theaccountancy.co.uk/guides-videos/claiming-for-business-expenses, but let us know if you need any help.

Best wishes

Elizabeth

Sarah
Sarah
25th September 2021 11:01 pm

Hi! Thanks, this is a very helpful page. One query though: The income from my hobby-business exceeded £1000 the first year, therefore needing to pay tax. If income then drops to less than the £1000 the next year, is income in the 2nd year still taxable?

Elizabeth Hughes
Admin
Elizabeth Hughes
29th September 2021 9:08 am
Reply to  Sarah

Hi Sarah

I’m glad you’ve found it useful! If your income is lower than the trading allowance then you may not need to complete a Self Assessment tax return, but you must tell HMRC why. You can double check if you need to submit Self Assessment using HMRC’s online checking tool for SA.

Best wishes

Elizabeth

Nathan Braine
Nathan Braine
10th November 2021 11:22 am

Hi, great info! Does postage and packaging count as an expense? Or is that still taxable?

Elizabeth Hughes
Admin
Elizabeth Hughes
10th November 2021 2:50 pm
Reply to  Nathan Braine

Hi Nathan

Thanks for your feedback! Yes, postage and packaging is an allowable expense. We have a guide which goes into more detail, if that helps, or call one of the team on 020 3355 4047.

Have a great day!

Best wishes

Elizabeth

Sue Buckland
Sue Buckland
15th November 2021 7:39 pm

My sister and I have had a partnership since 2008. We hand paint glassware and sell online and also at craft shows. We had an accountant but he has now retired and our new accountant within the same accountancy is saying we cannot have a partnership where the profits are not split 50/50.
We have always shared mutual expenses ie public liability, show booking fees, FSB subscription etc on a 50/50 basis. But because we have our own designs, the sales of which are not split 50/50.
Have we been doing this all wrong for all these years?

Elizabeth Hughes
Admin
Elizabeth Hughes
16th November 2021 12:46 pm
Reply to  Sue Buckland

Hi Sue

Thanks for your message. It depends on what the partnership agreement says, but if there isn’t one in place then it should be 50:50. It is possible to put a partnership agreement in place where the profits are split differently, but it depends if you have one in place already. I hope this helps, but just let us know if you need help with anything, or call 020 3355 4047 and one of the team will chat through it all in more detail.

Best wishes

Elizabeth

Richard Nmezu
Richard Nmezu
9th December 2021 4:45 pm

I started a sticker business in 2019 and I didn’t earn over £1000 and only made like £11 from sales do you I still have to do tax returns I have been charged with a big debt of 1304 pounds

Elizabeth Hughes
Admin
Elizabeth Hughes
10th December 2021 4:25 pm
Reply to  Richard Nmezu

Hi Richard

Thanks for your message! Without knowing all the details specific to your case, it’s difficult to say for sure. Normally if the total amount of sole trader sales in a tax year is less than the £1,000 trading allowance, you won’t need to send a tax return or pay tax on that income. If this is something you would like us to help with in more detail, please do call one of the team on 020 3355 4047, or use the live chat button on screen.

Very best wishes

Elizabeth
Best wishes

Elizabeth

Nellie Lawson
Nellie Lawson
25th January 2022 12:09 pm

Hello Kara! Very interesting article… I’ve been asked to ‘rent’ my home out for a photoshoot this year, do I need to pay tax on the money I make from this if it’s over £1000? I’m thinking about trying to actively seek out more opportunities like this but I’m nervous about having to fork out for business set up fees etc when I just don’t know how lucrative or viable it is yet. How do I go about testing the waters without getting myself into trouble? I do work part time and am PAYE with that employer… so I’m already… Read more »

Last edited 4 months ago by Nellie Lawson
Elizabeth Hughes
Admin
Elizabeth Hughes
26th January 2022 4:01 pm
Reply to  Nellie Lawson

Hi Nellie Thanks for your message! If you rent the property out as a private person, then you can use the £1,000 trading allowance towards the income that you make from that (even if you’re already earning above the Personal Allowance with your employer). If the income from this is more than £1,000 in a tax year, you will need to tell HMRC about it, but then you have a choice: you can either offset the trading allowance against it (basically, deduct £1,000 from the income, and pay tax on what’s left), or offset your allowable business expenses against it… Read more »

Richard Wells
Richard Wells
27th January 2022 9:43 pm

This might sound like a silly question, if I start a side business while employed does that side business get taxed separately as it’s own entirely or would I just be taxed at the same rate as my current job?

For example I’m a 40% tax payer, if I start a side business I won’t get charged 40% tax on income from that business would I?

Elizabeth Hughes
Admin
Elizabeth Hughes
1st February 2022 5:00 pm
Reply to  Richard Wells

Hi Richard That’s not a silly question at all! Basically, the short answer is, sadly, yes. When you complete your Self Assessment tax return at the end of the tax year, you’ll include the details of any PAYE income (from an employer). Because this has already had tax and NI worked out on it, it means that any allowances, like the Personal Tax Allowance, have already been used up. For tax, it’s useful to think of your self-employed income starting from where your employment income stops. You’ll be taxed at that rate once you add it on to your PAYE… Read more »

Sam
Sam
14th February 2022 10:56 pm

Hi Elizabeth,

Thank you for this, it is most helpful. A quick question if you don’t mind:

If an individual had a salary of say £30,000 per annum and earned an additional £1,500 a year from a hobby business, would that individual only need to declare £500 on the self assessment (which would then be taxed at 20%) owing to the first £1,000 of additional income not being taxable due to the tax free trading allowance? Of course this is based on no expenses being claimed.

Many thanks in advance.

Sam

Elizabeth Hughes
Admin
Elizabeth Hughes
21st February 2022 9:29 am
Reply to  Sam

Hi Sam Thanks very much for your message! The individual would still need to declare all of their self-employed income on their Self Assessment tac return – in this case, the full £1,500. If no expenses are being claimed, the individual would then complete the section of the Self Assessment which states they are using the £1,000 trading allowance, and this will then be offset against the £1,500 total, leaving them to pay tax on the remaining £500. And, quite right, that £500 would then be taxed at the rate that the taxpayer was subject to in that tax year.… Read more »

Levi
Levi
9th March 2022 3:33 pm

Hi,
I am looking to register my side hobby as a business.
I make no money from this, so do I still need to go through all the drama of taxes? Or do I just not say anything as it is less than that £1,000 mentioned above?

Elizabeth Hughes
Admin
Elizabeth Hughes
14th March 2022 2:14 pm
Reply to  Levi

Hi there

If the total income that you receive from self-employed activities in a single tax year is less than the £1,000 trading allowance, then you won’t need to register as self-employed with HMRC. If your total self-employed income is more than the allowance in a single tax year, you will need to register. And remember, working this out is based on your income, not just your profits!

I hope this helps, but let us know if you need anything at all 🙂

Best wishes

Elizabeth

Adam Denman
Adam Denman
14th March 2022 2:51 pm

This is a helpful article. Just to clarify something though. If I make £1500 with my hobby, and I earn £25000 through my salary, I only pay the 20% on the £1500 right? Because total income would be £26500 but £25000 is from my salary. Im just really scared Ill end up ruining myself with tax if I try and make some money with my hobby 🙁

Elizabeth Hughes
Admin
Elizabeth Hughes
14th March 2022 5:08 pm
Reply to  Adam Denman

Hi Adam Tax can sound so scary can’t it! OK, so if you earn £25,000 as a salary from an employer, they will (or should!) be deducting tax and NI from your wages each time they pay you, and then paying it onto HMRC on your behalf. So that part of your tax is taken care of, you won’t need to pay it twice. Then you earn a further £1,500 from self-employment. Add this on to your employed income to work out which tax bracket it falls into, so you know the tax rate – in this case it will… Read more »

Madeline
Madeline
13th April 2022 4:40 pm

Hi, is the £1000 trading income or trading profits? Given that i have a side business which revenue was about £7000 in revenue but after taking into consideration all expenses such as website, etsy fees, postage and packaging fees this was reduced considerable and also that i had to order more goods when out of stock so its a case of rolling money over. Does this still mean i have to fill out self assessment even though there is no profit? Thank you

Elizabeth Hughes
Admin
Elizabeth Hughes
14th April 2022 10:04 am
Reply to  Madeline

Hi Madeline

Thanks for your message. It’s the trading income – so if your total self-employed income, before any deductions, is more than then £1,000 trading allowance, you will need to submit a Self Assessment tax return.

As a side note, if your total allowable expenses are more than £1,000 then it will be better for you to claim these, rather than the allowance!

I hope this helps, but if you’d like to chat to the team, call 020 3355 4047 or use the live chat service – we’ll do all we can to help!

Best wishes

Elizabeth

Vicky
Vicky
15th April 2022 7:35 pm

Hi! Thank you so much for the super useful article and for answering questions too. Going back to your example with the hairdresser charging £20 for colour and only paying £5 with the dye, how does one also calculate labour, ie the time taken to do the job? I have a side hustle and I don’t make much profit at all, if I have to start paying tax this will considerably reduce the profit made and almost making this not worth it, as I already only include material in the calculations without the time taken to do it or the… Read more »

Elizabeth Hughes
Admin
Elizabeth Hughes
19th April 2022 9:44 am
Reply to  Vicky

Hi Vicky You’re very welcome! If you operate your business as a sole trader you can’t count your own labour as an expense. This is because there’s no legal separation between a sole trader and their business (basically you are the business) so you simply keep any profits that you make, rather than paying yourself a salary. It means it’s very important to make sure that you charge clients an amount which factors in your time! You may be able to claim other costs, such as the electricity that you mentioned for production. There are different methods for working this… Read more »

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