The past few months have completely transformed how we live and work. Many of us have taken up extra hobbies. Perhaps it's learning a new language, cooking a new dish for the family or maybe it's been a hobby that brings in a bit of extra income? It can feel like fun and games, to begin with. But then that thought of tax comes creeping in your head. What should you do?
In this post, we've pulled together our ultimate guide to paying tax on a hobby or side business so you can get back to enjoying it - exactly why you started it in the first place! So, hobbyist, take note!
Does it qualify as a hobby or side business?
A hobby is essentially something you do because you enjoy it, not because you want to gain financially. If you bake cakes or make jewellery in your spare time because it’s fun, that’s a hobby. But if you start to make money from these, then in the eyes of HMRC this becomes a business.
Trading Allowance
As of 6th April 2017, you have a trade allowance of £1,000. Your trading allowance gives you room to test your side business if you’re thinking of taking it full time, or to simply make money doing something you love.
The trading allowance means that your first £1,000 gross earnings on your hobby or side business are tax free. This means you don’t have to pay tax on it or report it to HMRC.
What happens when you earn more?
When you earn more than the tax free allowance, you’ll need to register for Self Assessment and pay tax on your profits.
If your side business is looking like it’s going to become a full time gig, then you may consider setting up as a Limited Company. Take a read of this blog to find out which option is right for you.
Log all transactions
When you start your hobby business, keep a handle on all your transactions. The easiest way to do this is through a tool like Xero, cloud accounting software which logs everything online. It could also be a great idea to set up a separate business account, making it easier to distinguish between business and personal transactions.
Be Honest
It might be tempting to keep things hidden from HMRC but be careful. HMRC has the power to keep an eye on sites like eBay, Amazon and Airbnb to see who’s trading and how much. Best to be honest and upfront about it!
How we can help?
For further guidance specific to your own circumstances, we recommending seeking professional advice. This will provide peace of mind and free up your time, instead of battling through your tax documents. For more information and advice, get in touch with Catherine today. Give her a call on 01423 431889 or email catherine@bctaccountants.co.uk.
Please note: all stats are accurate for the 2020/21 tax year.