Could you turn your hobby into a successful business?

Musical types buy and sell vinyl, write songs or make instruments. Arty types paint, take photographs or make ceramic pots. Sporty types cycle, go fishing or canoeing. Some write stories or poetry, while many others knit or sew, bake cakes, make jam or grow plants.

Most of us have hobbies. They make life more enjoyable because they’re fun and they can benefit our physical and mental health. But for some, they can also generate a welcome few extra quid.

Can I turn my hobby into a business?

Many people now run “side-hustle” businesses, often selling on such platforms as eBay, Etsy and Amazon after turning their hobbies into lucrative cash-spinners.

But not everyone has what it takes to run a successful business, no matter how much they love doing something. And sometimes a hobby is best suited to a spare-time business. However, hobbies can be turned into successful full-time businesses, enabling people to jack in their jobs and earn a living from their hobby or passion.

A less risky option might be to launch as a spare-time hobby business, and see how it goes before deciding whether to launch full time. Caution is also advised, because doing something for money can be a lot different to doing it purely because you love it.    

How much can I earn from my hobby before paying tax?

UK tax authority HMRC allows you to earn up to £1,000 of tax-free income from a hobby business. This is called your Trading Allowance. So, if you’re earning less than that a year, you won’t have to register your hobby business or pay any tax. But if you earn taxable income of more than £1,000 in a tax year (6 April to 5 April), you’ll need to register so that you can pay tax.

If you earn money from more than one hobby, the total taxable income from them all cannot be more than £1,000, if you want to avoid having to register and pay tax on your income.

How do I register my hobby business for tax?  

• Most people who need to report hobby business income to HMRC register as a “sole trader”, which is basically where you run your own self-employed business.
• As a sole trader, in law, you and your business are the same thing, so you’re personally liable for business debts. To avoid this, you can set up a limited company, but that requires more tax admin and cost.
• If you haven’t done it before, you must register for Self Assessment before 5 October in your business’s second tax year (6 April until 5 April), otherwise HMRC can fine you.

How much tax will I pay on my hobby business income?

Once your hobby business trading income goes over £1,000, if you’re earning more than the Personal Allowance (£12,570 in the 2024/25 tax year), you pay Income Tax on your “net profits” (ie total sales minus allowable tax expenses), with tax allowances also accounted for.

The amount of tax you pay is determined by the Income Tax band your taxable income falls into. Your taxable income can include income you earn from other sources (eg share dividend payments, rental income, pension payments, etc).

• You’ll pay the 20% basic rate of Income Tax if your annual total taxable income is £12,571-£50,270.
• You’ll pay the 40% higher rate of Income Tax if your annual total taxable income is £50,271-£125,140.
• You’ll pay the 45% additional rate of Income Tax if your annual total taxable income is more than £125,140.

(2024/25 for all figures; Income Tax bands and rates are different in Scotland).

Do I pay National Insurance on hobby business income?

• If your hobby business income is more than £12,570 a year, Class 4 NCs of 6% are payable on profits of £12,570-£50,270, with 2% payable on profits above £50,270. 
• From 6 April 2024, self-employed people with profits above £12,570 will no longer be required to pay Class 2 NICs, but will continue to receive access to contributory benefits including the State Pension. 
• Those with profits between £6,725 and £12,570 will continue to get access to contributory benefits including the State Pension through a National Insurance credit without paying NICs, as they do currently. 
• Those with profits under £6,725 and others who pay Class 2 NICs voluntarily to get access to contributory benefits including the State Pension, will continue to be able to do so. The weekly rate they pay will be frozen at £3.45 for 2024-25 

What tax expenses can my hobby business claim?

To reduce your tax bill, potentially, there are many tax expenses that your hobby business can claim, including:

• machinery and equipment
• stock or raw materials
• packaging and print
• broadband and phone
• travel (ie fuel, parking, train or bus fares)
• premises (ie rent, heating, lighting, business rates, etc)
• postage and office stationery
• marketing and advertising costs
• bank charges, insurance
• professional membership fees
• wages and professional fees paid to others
• safety clothes and business-branded workwear.

If you run your hobby business from your home, you’ll probably be able to claim for some of your heating, electricity and water costs, Council Tax, mortgage interest or rent, broadband and telephone use. Alternatively, you may be able to claim a flat rate.

You can only claim for genuine business costs. There can be severe consequences if you conceal taxable hobby business income or make fraudulent expenses claims. If you use something for business and personal reasons (a mobile phone being a classic example), you can only claim business use costs as an allowable tax expense.

Will my hobby business need to register for VAT?

If your sales that were subject to VAT in the past 12 months were more than £90,000 (the VAT threshold for 2024/25) or you expect them to be more than £90,000 in the next 30 days, you must register for VAT. That is more likely if your hobby business is full time and very successful. You register for VAT via government website GOV.UK.

Will my hobby business need to keep tax records?

If you need to register your hobby business and pay tax, you must maintain accurate, up-to-date records of your sales and costs, with exact figures and dates, so that you can complete your Self Assessment tax return and evidence your income and costs should HMRC ask you. HMRC can fine you if your records are not accurate, complete and legible. Also keep receipts and invoices for things you claim as tax expenses.

How do I report my hobby business income to HMRC? 

You complete a Self Assessment tax return each year, the main SA100 tax return and the SA103 supplementary page, summarising your hobby business income, as well as all expenses and allowances you claim.

You can file your Self tax return any time after the tax year finishes on 5 April, although the annual deadline for filing your Self Assessment tax return online is midnight on 31 January. A £100 fine is payable immediately if you miss the filing deadline.

After HMRC receives your tax return, it will tell you how much tax you owe. The deadlines for paying your tax bill are usually: 31 January for any tax you owe for the previous tax year (known as a “balancing payment”) and your first “payment on account”; then 31 July for your second payment on account.

Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.