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Small Business Tips

When Does Hobby Income Become a Business for Tax Purposes?

Peter Wise
Woman boxing plant terrariums in workshop

Here in the UK, many of us have a hobby or two that we love doing. For many it's collecting – books, stamps, coins, bits & bobs or almost anything. For others, it's making things – clothes, ceramics, baked goods, arts and crafts, for example. Perhaps you have a skill you use to make a little extra cash, such as expertise in alternative therapy, counselling, gardening or almost anything.

Whether it's possessions, creations or skills you like to market, your hobby can generate some useful income. But it can also have a tax liability. So in this article, we're looking at what you need to know when it comes to UK hobby business tax rules and other aspects of running a side business.

Do I have to pay tax on hobby income?

The short answer is, yes, you're liable for the tax. But the good news is that the rules are less strict than they once were. Until 2017, you had to pay tax on any income received from a hobby in the previous tax year – even if the amount you earned was a few pennies.

Then from 6th April 2017, the rules changed as the government introduced a new £1,000 trading allowance. This threshold change means that, as long as your gross income is below £1,000, you don't have to pay any tax or even register for self-assessment. The reasoning behind the allowance was that the government recognised that, in the then-Chancellor's own words:"…It is becoming easier for more and more people to become ‘micro-entrepreneurs'. However, for those making only small amounts of income from trading or property, the current tax rules can seem daunting or complex." So whether you're selling cakes or ceramics, trading vintage coins or toy cars, selling online or at car boot sales, or just marketing your skills on a small-scale basis, you don't have to worry about being taxed for your hobby income.

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The difference between a hobby and a business

For the Inland Revenue, your hobby becomes your business when your turnover goes over the £1,000 mark. It's then that you should think about registering as a sole trader. If it looks like your hobby is becoming a leading source of income or even your primary employment, then you could consider setting up a limited company.

Although this requires more paperwork (especially with a limited company), there can be significant tax advantages. Including, of course, tax allowances. (If you end up using your car or other vehicles for business purposes then our mileage tracker app could be handy.)

What else should you be aware of with hobby income tax?

If you're trading as a partnership, you aren't eligible for this allowance. So, it's best not to involve your other half or anyone else in your hobby.

If you have a limited company, you shouldn't sell anything to it as this nullifies the tax-free trading allowance. The same applies to an employer or a close relation, or to a partnership of theirs.The £1,000 limit applies to the total income of all you do – you can't get around the maximum by inventing different categories of hobby income. You can also read more about the latest hobby income tax regulations.

Part-time side business – sticking to the rules

The allowance means that many hobby traders can breathe a sigh of relief when it comes to their activities. But if you're tempted to stretch or break the rules and go above the limit without declaring it, be careful. HMRC has been asking for extra powers to monitor small-scale traders, especially online. They look closely at sites such as eBay, Amazon and Airbnb to see who is trading and at what levels. So don't get caught out.

What do you need to start a hobby business?

The chances are that you already have all that's required to get your hobby business going – ambition, instincts, skills, possessions and free time. Just remember to keep an eye on the hobby business tax rules – and that all-important £1,000 threshold when your hobby becomes a business. Happy selling!

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