During the pandemic people have poured their energy into their hobbies. Baking cakes, selling old clothes and dog walking. Crafts, gardening, breeding animals and singing with a band. You name it. Many have been growing their spare time projects to earn extra money. The burning question is this. When does a hobby become a business?
Understand your responsibilities
Essentially, a hobby is for fun and generates no profit. In this case you don’t need to inform HM Revenue & Customs (HMRC). What if the things you make or services you provide bring in an income? Check. It’s vital to understand your tax and NIC responsibilities.
How much income your hobby brings in is key. Everyone has a Trading Allowance of £1,000. Consequently, you can generate up to £1,000 in a single year. And you won’t have to pay tax.
When does a hobby become a business?
Already exceeded the £1,000 turnover limit? Your hobby is now classed as a small-scale business. So, sign up for self-assessment. Register as a sole trader. Once registered you’ll need to fill in a tax return. And pay tax on your profits. HMRC will calculate your tax and NIC bill.
Maximising the Trading Allowance
Indeed, income can come from several hobbies. Plus casual work. Therefore, you can allocate the Trading Allowance between them. But you don’t have to use it. You can deduct the Allowance when income exceeds £1,000. Alternatively, you can choose to deduct your expenses. When expenses are greater than £1,000, deducting them will incur less tax. Certainly, you may incur set-up costs. Along with ongoing expenses. Perhaps you’re paying out more than you’re earning? If so, file a self-assessment tax return and claim for the loss.
Pay tax and NIC
Your tax and NIC liabilities depend on your total income. Your salary from your main job – employment or self-employment – as well as hobby earnings. If your overall income is less than the £12,570 Personal Allowance, no tax is due. However, if your profit exceeds £8,632 you will have to pay NIC Class 4.
Is your hobby turning into a small business? There are obvious signs when it is. For example, you make a regular income. The activity is profitable. Typically, you’ll buy in materials for stock. You mark up the price when you sell on.
Often, you will be marketing your enterprise. Have you registered on online trading sites such as eBay, Amazon or Etsy? You might be spreading the word via a website. Invariably, you’re talking about your products or services on social media. Be aware that HMRC is known to check these outlets and social media channels.
Don’t get caught out. It’s not worth the risk. Fail to register a small business and pay any tax due and HMRC could levy a fine. Crucially, it could also demand repayment of taxes accrued. Remember, HMRC can check back over several years.
So, stay vigilant and always keep records. Note down your hobby income. Keep receipts for all expenses, such as raw materials. You can reclaim some of the money you’ve spent.
When does a hobby become a business? Invariably, it depends on your personal circumstances. And your ambitions. If you need advice, call our team on 01785 243276.