Many people have been using their hobbies to make some extra money recently, this is especially useful if you are currently furloughed due to Covid. It’s also a great idea for parents who have given up work to stay home, or anyone who has a hobby that can make them some extra cash now and then.
Whether you sell things you’ve made such as crafts or cakes, or earn money singing or playing in a band as your ‘side hustle’, it’s important to understand what the tax liabilities are.
Here we explain the hobby business tax rules and when you need to register your hobby as a business…
Is it a hobby or a business?
It’s important to understand whether or not your hobby is considered to be a business by HRMC, to avoid any fines for unpaid tax.
You’re not required to pay tax on hobbies, so if you are simply doing something you enjoy and not making any profit, then you do not need to tell HMRC.
However, as soon as you start earning an income from your hobby, then it may be considered a business by HMRC.
To work out if you need to pay tax on your hobby, HMRC have a series of questions known as HMRC Badges of Trade.
If you answer yes to any of the following questions, then it is likely that your hobby is now a business:
- Do you sell products or services to make a regular income?
- Do you make items to sell on at a profit?
- Have you registered as business on Etsy, eBay, or Amazon?
- Do you buy stock to hold onto?
- Do you buy items at wholesale to sell on for a profit?
- Do you plan to increase your income from your hobby?
- Do you have a website or a social media page where you market your products or services?
- Are you working towards creating a brand?
Do I need to declare income from my hobby?
If you are making money from your hobby then you will need to declare it to HMRC and will be liable for the tax earned on any income you have received.
How much Income Tax you will have to pay will depend on how much total profit you have made.
If you have more than one source of income, e.g. a full or part time job with a money-making hobby in your spare time, you will need to add together all income received in order to calculate how much additional tax you will need to pay.
How much can I earn from my hobby before I have to pay tax?
HMRC have a tax-free trading allowance for micro-business owners earning money from hobbies, including those selling on Etsy, eBay, and Amazon.
This tax-free trading allowance means there’s no tax to pay on the first £1,000 you earn from your hobby. After the first £1,000 it is then considered a business and you are required to pay tax on any profits, as well as complete a self-assessment tax return each year.
Once your hobby’s turnover exceeds the £1,000 threshold you need to register with HMRC for self-assessment.
Don’t forget to keep track of your expenses, such as any materials used, as you will be able to claim back some of the money you have spent on your business.
If you have any questions about starting a business or registering as self-employed, please feel free to get in touch with us here at Magpie Accountancy.