When does a hobby or side hustle become a business?

When does a hobby or side hustle become a business?

Do you have a hobby or side hustle which is starting to earn you some extra income? Before you start spending the money, have you considered the tax implications?

Developing a new income stream can be rewarding and fun, particularly if it involves doing something you love, such as baking or fixing old cars. Once your activity returns a reliable income, it has turned from a hobby into a business

“Earning a little bit of extra money on the side can really come in handy, particularly if your main income has been affected by the pandemic” says Emma Roberts from OneClick Accountant. “However, just because it is a hobby business doesn’t mean it is exempt from income tax. HMRC takes into account all your earnings when calculating income tax, so take action now to avoid receiving a nasty surprise from the taxman.” 

To help you, Emma has produced this simple guide so you can stay one step ahead of HMRC.

When do I start paying tax?

You don’t need to report every pound you make from a hobby business, but you will need to report any earnings which exceed your trading allowance of £1,000 per year. This means every UK taxpayer can earn a tidy sum tax free. The allowance figure is the total turnover from your side hustle, not your earnings minus expenses.

When your turnover exceeds the £1,000 limit, you will need to register for a self-assessment tax return. If you have one main source of income, your employer will handle all your income tax and National Insurance contributions. When you have more than one income stream, you will need to file a tax return so HMRC can calculate your level of income tax.

You only start paying income tax once your total earnings exceed your annual personal allowance, which is £12,570 for the 2021/22 tax year.

When you have a hobby business, it is good practice to record your income and expenditure regardless of how much money you are earning. This way you will be able to judge when you are close to your trading allowance.

Is it a hobby or is it a business?

Ask yourself this simple question: what are you hoping to achieve from your hobby business? If you just want to do something enjoyable outside of work, you can do this providing that you stay within your trading allowance of £1,000 per year. 

If things start to take off, you may wish to take it more seriously and to treat your side hustle as a growing start-up business.

If this is the case, you must register as a sole trader with HMRC and start keeping accurate records of all your finances. You will then need to submit your self-assessment tax return to HMRC before the January 31 deadline.

Conclusion

“People wrongly think that HMRC is there to stamp out hobby businesses. The truth is that the trading allowance allows you to make a little extra money tax free,” adds Emma. “When earnings become more regular, that’s when HMRC will start treating you like a business.” 

If you would like professional advice from a friendly finance expert, contact Emma Roberts at emma.roberts@oneclick.group.