WHEN DOES YOUR HOBBY BECOME A BUSINESS?

It has never been easier to make money from your hobby, whether it be selling cakes on Facebook or handmade bracelets on Etsy.

However, if your hobby is going well and giving you regular income it may have become a business.

Some questions to consider to determine if it is a hobby or a business:

  • Have you registered as a business on Amazon, eBay or Etsy?
  • Do you have a social media page where you advertise and take orders for your product or service?
  • Do you make goods with the intention to sell on at a profit?
  • Do you regularly sell a product or service to make an income?
  • Do you plan to increase your income from your hobby?

 

If you answered yes to any of these questions, then it is likely that your hobby is a business.

WHEN DO I NEED TO PAY TAX ON MY HOBBY INCOME?

Some good news. There is a HMRC trading allowance, so the first £1,000 that you earn in a tax year is free of tax.

Once your income exceeds the £1,000 allowance you need to register for Self Assessment. This is the method used to declare all income earned in a tax year and calculate if any tax is due.

The Self Assessment will take into account any employment income and business income for the tax year, which if below the Personal Allowance (£12,570 for 2021/22) there will be no tax due.

In addition to tax, you may also have to pay Class 2 and Class 4 National Insurance contributions. Class 2 NICs are due if your profits are above £6,515 (2021/22), and Class 4 NICs are due when profits are above £9,568 (2021/22).

WHAT INFORMATION DO I NEED FOR MY SELF ASSESSMENT RETURN?

You will need to log all income and expenditure involved with your business so your tax calculation is clear and accurate.

Do not forget about claiming the expenses incurred as this will help reduce any tax due.

Expenses will include, but are not limited to stock purchases, vehicle expenses, postage, stationery, phone and bank charges.

Keep records of all business income and costs in case you are subject to a tax investigation. HMRC advises you to keep tax records for at least 22 months after the end of the tax year the tax return is for.

So if you send your 2020/21 tax return online by 31 January 2022, keep your records until at least the end of January 2023.

Starting a business can be a scary prospect but don’t be put off. Being your own boss, even part time can be very rewarding.

If you need any help feel free to contact us.

Good luck!

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