Starting a side business based on a hobby can be an exciting opportunity to turn your passion into a profitable venture. But along with the thrill of entrepreneurship, you must also consider the financial and tax implications. Good news though, the UK government has introduced a tax-free trading allowance for small hobby-based businesses to make it easier for you to get started.
In this guide, we’ll take a closer look at the tax-free trading allowance, how to make the most of it, and how to handle your tax and accounting obligations for your side hustle.
What is the Tax-Free Trading Allowance?
The tax-free trading allowance means that the first £1,000 you earn from your side hustle (gross, before expenses) is tax-free. You don’t have to pay anything on this income, or even report it to HMRC. There’s also a £1,000 allowance for property income if you’re renting out rooms or homes.
If you earn more than the tax-free allowance, you’ll need to register for Self Assessment and pay tax on any profits. You have two options:
- Deduct the £1,000 allowance from your gross income and pay tax on the remaining
- Deduct allowable expenses from your gross income and pay tax on the profits that are left.
It’s up to you which option you choose, but you can only use one method at a time. You may want to consult a professional accountant to determine which option is most tax-efficient for you.
Should I Turn My Hobby into a Business?
Starting a business from your hobby is a big step, and you must be prepared for the responsibilities that come with it. You’ll need to consider profitability, expenses, tax, marketing, and admin, in addition to the product or service you’re offering. If you’re selling things to make a profit, or your sales are consistent or ongoing, you’ll need to pay tax on your sales.
Don’t let the thought of tax and accounting scare you, though. With the right support and tools, you can turn your hobby into a successful and tax-compliant business. Here’s how:
Log all of your Business Transactions
As you start to do regular work, it’s crucial to log all your transactions so that your income and tax are clear and accurate. We recommend using accounting software such as Xero or Sage to manage your finances. With these tools, you can easily link your bank account, and your transactions will be automatically recorded.
We also suggest opening a separate business bank account to differentiate between business and personal transactions.
Claim Your Allowable Expenses
When you start to pay tax, you can reduce your tax bill by claiming expenses. A portion of your profits will be taxed (usually 20%). However, if you’re spending some of that profit back on the business, it’s not considered profit by HMRC. You can deduct the amount you spend on expenses from your profit figures, which will reduce the amount you owe in tax.
Here’s an example of how expenses work against tax for a plumber:
A plumber charges £100 to install a new boiler. The plumber spent £50 on materials. This means that the plumber has made £50 in profit, because £100 – £50 = £50.
They will pay income tax at a rate of 20% on the profit, which is £10 (£50 x 20%).
Without expenses, the plumber would pay £20 in tax on the full £100 (which is £100 x 20
And if you need support with setting up software like Xero or Sage, or if you’re looking for assistance with registering for taxes and filing returns, we’re here to help! Our team of experts has the knowledge and experience necessary to guide you through the process and ensure that everything is set up correctly. Don’t hesitate to reach out to us for assistance – we’re here to make sure your business runs smoothly and successfully.