Turning a hobby into a full-blown business has become a real possibility for many people over the last ten years. With thousands of places to sell products online, it’s relatively easy to start bringing in an income, however small and niche your operation is.
But when does that hobby officially become classed as a business in the UK and therefore mean you start to pay tax on the income you earn?
Hobby income can vary depending on the success you have in selling your products. You may only make a few hundred pounds a year offering face masks on a site like Etsy, for example. You might be more successful and suddenly find yourself flourishing and earning more.
The key to whether you are classed as a business in the eyes of HMRC is when you exceed the tax free trading allowance. This is currently set at a turnover of £1,000 in any single tax year. That means you can earn £1,000 from your hobby before you need to start paying tax.
The threshold applies even if you are in work and earning money through your main job and using the hobby to boost your earnings. Once you exceed the £1,000 threshold in any one tax year, however, legally you are obliged to inform HMRC and pay income tax.
Here we look at hobby business tax rules, who they apply to and how to complete a self-assessment tax return if you exceed the threshold.
Do I need to register my hobby as a business in the UK?
In most cases, if your hobby is bringing in less than £1,000 in any financial year, you do not need to inform HMRC of your income and you will not need to pay income tax on your profits.
If you are above this threshold, you will need to register for the self-assessment tax return which means you will be taxed on the income that you make above the £1,000 mark.
The tax free trading allowance was introduced in 2017 as a way to help people who made money from their hobbies but weren’t making substantial amounts and it was not their main source of income.
HMRC has a useful online tool that you can use to check whether you need to register for self-assessment for your hobby and for any additional income received.
What is the difference between a hobby and a small business?
In short, a hobby is something you enjoy doing and usually doesn’t supply you with any profit. You might be an artist who sells a few drawings or paintings here and there during the year.
Maybe you’re into upcycling and transforming old furniture which you sell on a site like Etsy.
A small business or sole trader is running their operation with the focused purpose of making money. While they may have other income from another job, they are looking to use their self-employed status at least to build a business operation of some stature.
Technically, the whole ‘will a hobby become a business’ question begins when you start to make money from selling things.
However, because there is a threshold with the tax-free allowance, HMRC itself does not consider you a small business until you go over that £1,000 a year limit.
The truth is that the two can overlap and the term hobby business has been coined to refer to those operations where it’s not quite one thing or the other.
How much money can you make before a hobby becomes a business?
When your hobby takes in more than £1,000 in turnover, you will need to declare income to the HMRC as you will also need to pay tax on your profits, however, small the amount.
How much income tax you will pay depends on your earnings and what allowable expenses you use to offset this.
It’s important to note that the threshold of £1,000 refers to gross income, irrespective of the costs that you incurred, for example, in buying materials for your hobby or advertising online through a site like Etsy or eBay.
What is the tax free trading allowance?
The tax free trading allowance was introduced a few years ago and gives the average hobbyist a little leeway in making money from their activities.
It currently stands at £1,000 in any tax year (April to April).
It can apply to any type of hobby but can also be used as an allowance if you get a small amount of income from the property you own.
How do I report income from a hobby?
First of all, it’s critical if you are making money from your hobby to keep track of your sales and the expenditure incurred such as materials and advertising.
You only need to report and pay tax if your income goes above the £1,000 threshold at which point you technically become a business in the eyes of HMRC.
To report income, you need to sign up for self-assessment on the HMRC website. It’s relatively easy to do this and once you’ve registered, you will be issued a unique tax reference.
You will need to complete a self assessment each year and submit it to HRMC before the end of January.
Can I run a business as a hobby?
The short answer is yes. A business is an entity that is designed to make money and many people have turned their hobby into a business opportunity over the years. How big or small you want this to be is entirely up to you.
Can hobby expenses be deducted?
The threshold of £1,000 relates to the total turnover you get from selling through your hobby. It does not take into account expenses. These only become relevant when you go over the threshold and need to declare income for tax purposes. You can then use expenses to off-set your tax bill.
Does a hobby become a business just because you are making some money? The answer is no. Many people use their hobby to earn a little extra income and you can, since 2017, have a turnover of £1,000 before you need to register for self assessment and start paying tax.
If you are thinking of developing your hobby into a full-blown business opportunity, the team at VW Taxation are here to help. Contact us today to find out more.