Do I Need To Pay Tax On My Hobby/Side Business

Is there something that you love doing? Something that you’re good at and enjoy? Chances are your thoughts have turned to making money from it. Why not?

Some seriously successful businesses have been born from a simple idea that starts at home. What many people don’t understand is, doing it for the pure fact that you love it is very different to when it becomes a business. There’s lots to consider, from profits, expenses and tax to marketing and admin.

If you’re sure that it’s what you want to do, we’ve got some helpful advice for you in this blog post. The most important thing to ensure is that what you’re doing complies with legislation and tax laws.


Am I required to pay tax as a side business?

One off sales probably don’t require you to declare this income to HMRC. It’s not really a business if there isn’t a constant flow of sales.

On the other hand, if you plan to sell things in order to gain profit, or if your sales are ongoing and consistent, there’s a large chance that you will need to pay tax on these sales.

Good news

Your sideline earnings could possibly be viable for tax relief.

Last April, HMRC brought in a new allowance to protect ‘self-starters’ with hobby-based businesses. So what does this mean?

The first £1000 that you earn is tax free. There’s no need to pay anything on this, you don’t even need to declare it.

When you begin earning more than the tax free allowance, you’ll have to register for self-assessment and therefore pay tax on profits. Following on from this, there’s 2 options:

  • Deduct the £1000 from your gross income and pay tax on the remaining
  • Deduct allowable expensive from your gross income, like most businesses do

Keep a log of ALL transactions

As your work becomes more regular, we can’t stress the importance of logging ALL transactions. This way, your income and subsequently, your tax is clear and as accurate as possible.

There are a lot of bookkeeping software options available to ensure your transactions are logged properly. Most allow you to link your bank account up so that these logs form automatically.

A strong recommendation that we give all start-ups is to open a separate business bank account – this makes it easier to track your expenses.

Claim all of your expenses

As you begin to pay tax, claiming for expenses can reduce your tax bill. You will need to pay tax on a percentage of your profits (normally 20%). However, if you’re spending some of that profit back into the business, HMRC doesn’t view it as profit.

To reduce the amount that you’ll owe in tax, you can deduct the amount that you spend on expenses from your profit figures.

For example, if you’re a baker and charge £30 a cake, but spend £10 of that on ingredients/materials then you pay tax on the £20 that you make overall.

What’s the difference for a sole trader or a limited company?

At the time of registering as self-employed with HMRC, you’ll need to decide whether you operate as a sole trader or a limited company. You can read about the pros and cons of being a limited company here.

As a sole trader, tax returns are usually simpler. As a hobby-based business, this will suit you better. Although, some people do prefer the limited liability of a limited company in the event of debts ending badly. This is also the case for some as with a limited company you are able to nominate more than one shareholder and also pay dividends.

Don’t try and manage it yourself

Where tax is concerned, you can’t afford to get wrong. Both financially and legally. We’d always suggest seeking professional advice. It’s peace of mind and you don’t need to spend hours upon hours battling through your tax documents. If you’d like expert help, contact us today for a free consultation.


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