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Side Hustles - When Do I Need To Declare My Income From My Hobby?

Imagine turning your hobby into a source of income! Excitingly, many successful businesses and side projects originate from hobbies and interests.


It's becoming increasingly common for people to run side-hustle businesses in their spare time, ranging from woodworking to graphic design and everything in between. For some, it's a means of earning extra income from a beloved hobby, while others use it as a stepping stone to explore self-employment.


Wood Work / Hobby

When does a hobby become a business?

Trying out a side business related to your hobby is a great way to see if entrepreneurship suits you and if your hobby can bring in money. In simple terms, your hobby turns into a business when you start selling your products or services, and your earnings exceed £1,000 in a tax year. This £1,000 limit is called the Trading Allowance.


What is the tax free trading allowance?

HMRC created this tax-free allowance to support individuals with small, hobby-driven businesses. Essentially, you can earn up to £1,000 from self-employment within a tax year without needing to inform HMRC or pay tax on that income. It's important to note that this £1,000 is for all your side businesses combined; you won't receive a separate Trading Allowance for each one!


What if I earn more than the tax free allowance?

If your earnings exceed £1,000 in a tax year, congratulations! However, it's essential to inform HMRC at this point. Neglecting to register your business when required can result in financial penalties and the need to pay backdated taxes.


Will HMRC know if I earn more than the trading allowance?

Depending on how you earn your self-employed money, HMRC might become aware of it regardless of whether you notify them. Certain digital platforms automatically report income to HMRC annually.


For example, if you sell on Etsy, this information might be shared with HMRC. However, as long as you're following tax reporting rules, you may not need to change anything!


What business structure should I choose for my side-hustle?

The term "side-hustle" doesn't specify a legal framework, so you'll have to select one when you register your business. The advantages and disadvantages of each option depend on your situation, so it's wise to do some research or consult with an accountant or business advisor before making a decision.


The most common choice for side-hustlers is to register as a sole trader through Self Assessment. It's straightforward to set up, there's no fee, and your information remains private, unlike registering a limited company. But, as always, it’s important that you choose the structure which is best for you!


The Trading Allowance if you register as a sole trader

If you register as a sole trader, you might still be able to use the Trading Allowance for tax relief against your income. Here are your options:


1. Subtract the £1,000 allowance from your gross income and pay tax on the rest.

2. Deduct allowable expenses from your gross income, similar to how businesses operate, and pay tax on the resulting profits.


You can only choose one method at a time. Consider which option is most tax-efficient for you. If your expenses total less than the trading allowance, using the allowance against tax could be more beneficial.


What you should do if your hobby has turned into a business


Log all of your business transactions

As you begin working regularly, it's crucial to maintain accurate bookkeeping records to track all your transactions. This ensures clarity and accuracy when it comes to your income and taxes.


Using user-friendly bookkeeping software like FreeAgent can simplify this process. You can link the software to your bank account, allowing transactions to be automatically imported.


Additionally, many individuals find it helpful to open a separate bank account for their business, making it easier to distinguish between personal and business transactions.


Claim your allowable expenses

When it's time to pay taxes, you can lower your tax bill by claiming expenses. Usually, a portion of your earnings is taxed, typically at a rate of 20%. However, if you're reinvesting some of your profits back into the business, HMRC doesn't see that as profit. By subtracting your business expenses from your profit, you can decrease the amount you owe in taxes.


Got any questions? If you would like to speak to an accountant, contact info@kmaccountancy.co.uk or 0141 266 0563.



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