Do I Need to Pay Tax on Income from Hobbies?
If you’re asking the question above, it shows that you’re getting a lot of interest in whatever it is you do in your spare time. First of all, the team at TreyBridge Accountants would like to say congratulations, as there’s nothing quite like making money from a skill or craft that you enjoy.
Now, to answer the question of whether you need to pay tax on income from hobbies, it all depends on the scale of your sales activity. Here’s a handy guide to help you understand what you need to do.
The Trading Allowance
You may not realise that there’s a fantastic thing called the Trading Allowance in place. This gives you the ability to sell up to £1,000 of items each tax year without paying tax on them.
A common example is someone who creates jewellery and sells it on Etsy but only now and then, with the turnover (the amount of money they make) being less than £1,000 a year. As long as their sales remain below the threshold, they don’t have to register for self-employment or pay tax on the profit.
What if I earn more than £1,000 a year?
If your hobby is getting a lot of attention and more people begin to buy your products, you need to keep track of how much money you make. Once you exceed the £1,000 Trading Allowance, you’ll have to register for self-assessment if you haven’t already.
Does this mean I’ll have to pay tax on sales?
Not necessarily, as we then have the Personal Allowance. This is the amount you can earn without paying any tax on it, which is currently £12,570 (for tax year 2021/22). This allowance considers all of your income, including that from employment, self-employment, renting out property, and so on.
If you stay below the threshold, you’ll need to submit a self-assessment tax return each year to HMRC but there won’t be any tax to pay.
Moving from a hobby to a business
Many of our clients started off selling their creations now and then, only to find that there was high demand. This often results in the individual increasing output, which in turn leads to it transitioning from a hobby into an actual business. This could be as a sole trader or even involve the founding of a limited company if required.
In turn, this means that you’re now a business owner and you’ll most likely start focusing on new goals, such as increasing sales, improving cash flow, hiring freelancers or taking on staff, and developing your brand as it grows.
TreyBridge can help
Whether you’re just selling a few items and want some tailored advice, plan to ramp up your sales activity and need a consultant, or have reached the tipping point and require an accountant to manage your tax, the specialists at TreyBridge are ready to help.
Get in touch
We love supporting small business owners and entrepreneurs. Call our Yorkshire office on 01482 235575, our London office on 0207 885 0605, or fill in the contact form below.
Tagged as: Personal Wealth
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