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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 a free quote from us today to see how much time, stress and money you could save.

About The Author

Kara Copple

An experienced business and finance writer, sometimes moonlighting as a fiction writer and blogger.

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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 days 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 »

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