When Does A Hobby Become A Business For Tax Purposes?

If you’re asking yourself “when does a hobby become a business?”, then good news – your side hustle has evolved into a reliable source of income! Of course, this can often result in some changes to…

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Last Updated: 5th December 2023

If you’re asking yourself “when does a hobby become a business?”, then good news – your side hustle has evolved into a reliable source of income! Of course, this can often result in some changes to taxation that require you to:

  • Register for Self Assessment
  • Report your gross income and expenditure
  • Keep suitable records
  • Pay Income Tax and National Insurance

So, to help you adjust to the changes in your responsibilities, we’ve provided a guide on all things tax for small-scale side businesses.

Do I need to start paying tax on my hobby income?

Firstly, you’ll only need to report your earnings from your hobby if they exceed your Trading Allowance. This is a £1,000 turnover limit that all UK taxpayers are allowed to earn tax-free, in a single tax year, from things like a hobby or a project they do in their spare time. This means income over £1,000 can either have the allowance deducted or actual expenses deducted. This can be useful if your expenses are less than £1,000.

What if I earn more than the tax-free allowance?

Once your turnover exceeds £1,000, you need to register for Self Assessment. This is the process by which you file your tax returns and let HMRC know how much Income Tax you owe.

However, depending on how much you earn, you may not be required to pay tax at all. According to tax rules, only those who earn above the Personal Allowance annually (including all other income) are required to pay Income Tax. For 2023/24, the Personal Allowance is £12,570.

BandTaxable income    Tax rate
Personal Allowance   Up to £12,5700%
Basic rate £12,571 to £50,27020%
Higher rate£50,271 to £125,14040%
Additional rateOver £125,140
45%

What’s the difference between a hobby and a business?

A hobby is when a person enjoys doing or making something outside of their regular line of work. Usually performed part-time, hobbies can be anything from arts and crafts to selling your old clothes.

A self-employed business owner, on the other hand, is typically more focused on making a profit out of what they’re doing, has several customers, and can hire other people.

However, the two can overlap when your hobby turns into a ‘hobby business’. This happens when you have a hobby where you can sell your products or services and your income surpasses £1,000. At this point you have exceeded the Trading Allowance, as mentioned earlier, and you must now register for Self-Assessment.

What else should I be aware of with my hobby and Income Tax requirements?

Not only will you need to register as a sole trader with HMRC, but you’ll also need to prepare your tax return. This involves accurately logging all income and expenditure for each tax year, and declaring that to HMRC before the Self Assessment deadline.

HMRC will then use this information to calculate your Income Tax, National Insurance and, subsequently, your tax bill.

How GoSimpleTax can help

At GoSimpleTax, we make all this easy. We can help log your income and expenditure, and we can also flag any potential opportunities for you to make tax savings.

Once you’ve inputted all your information for the tax year, we’ll automatically calculate your forecasted tax bill, populate your tax return, and send it directly to HMRC electronically. You can even try out some of our features with a freemium account.

Ready to take the stress out of your taxes? Sign up today.

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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.

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