A hobby is an activity performed for fun, whether that’s making art prints of movie stills or teaching guitar basics on YouTube. When this activity becomes monetised, that’s when you draw the attention of HMRC and your hobby may be regarded as a business. This turns the money you make into taxable income.
Once your income (not profit) exceeds the annual trading allowance of £1,000, you need to declare this income to HMRC. However, if the sole purpose of your activity is to turn a profit, then you’re running a business and must advise HMRC once your annual income exceeds £1,000. Of course, you might just be selling old clothes on the likes of eBay or Depop in order to make a little pocket money, and if these are your personal possessions then there is no need to report this to HMRC.
To help keep you on the right side of the taxman, we’ve invited Mike Parkes from GoSimpleTax to explain this further – as well as outline your next steps if you need to report taxable income.
What is the trading allowance?
If you’re selling across the likes of Facebook Marketplace, Etsy, or eBay in your spare time, then you have a set amount of money you can earn before you’re required to tell HMRC. Specifically, you can earn up to £1,000 a year tax-free. This is what’s known as your trading allowance.
To make sure you don’t exceed the amount, keep a log of all sales made across each platform. This protects you in the event of an HMRC investigation as well as helps you stay on the right side of your tax-free £1,000. Of course, if you don’t have any other earnings aside from those you get from your online selling, you won’t pay tax until you earn more than your Personal Allowance.
What is my Personal Allowance?
Your Personal Allowance is the amount of taxable income you can make before you incur Income Tax. It factors in employment earnings, rental income, and any additional online trading profit you make – among other sources. Therefore, if the items you sell online result in less than £12,570 annually (the Personal Allowance as of 2021/22), and you have no other sources of income, you won’t be charged any Income Tax.
Once you exceed that amount, you’ll be taxed:
- 20% on the portion of earnings between £12,571 and £50,270
- 40% on the portion of earnings between £50,271 to £150,000
- 45% on the portion of earnings over £150,000
The same is true if you pay tax through PAYE at your current employed role and earn more than your trading allowance. You’ll be charged Income Tax according to the total amount of taxable income that you earn.
Do I have to file a tax return?
You have to file a Self Assessment tax return if you exceed your trading allowance, regardless of whether or not you’re employed. In it, you’ll need to report all the sales you’ve made along with any associated business expenses. But before you do this, you’ll need to register for Self Assessment. How you do this will depend on if you’re self-employed or not.
Once you’ve registered, you’ll receive a letter with your Unique Taxpayer Reference (UTR) number on. This reference number is essential to using HMRC’s Self Assessment service and takes 10 days to arrive, so remember to register long before your deadline. Once it has arrived, you’ll need to wait for your activation letter, which comes with your activation code. Only when you have both are you able to file your tax return.
Can I lower my tax bill?
When HMRC treats your online selling as a business, you’re free to enjoy the benefits of business expenses. Business expenses are purchases you make that can be claimed back on in your tax return, provided the purchase was for business purposes. For example, you may be able to claim on:
- Office supplies – any stationery you use, envelopes or printing costs
- Delivery costs – postage and packaging costs
- Website charges – either for your own website or the fee of the seller site
- Bank and credit card fees – charges incurred from selling online
- Marketing and advertising costs – any adverts you may run on seller sites
You might even be able to reduce the cost of running your home! A portion of your utility bills, council tax, and telephone and internet costs can be considered a business expense, depending on the amount of time you spend using your house as a base for your online selling. All you need to do is keep a log of the expenses you’re claiming, and store evidence for them should HMRC ask for it, and you’ll potentially reduce your total tax bill.
Getting the most out of your online sales
If your hobby tips slightly into business territory, don’t panic. Registering for Self Assessment and completing your tax return is straightforward provided you have the right tools and act early. If your sales exceed £1,000, register as soon as you can, and ensure you keep records of your income and expenses to include them on your tax return.
From there, you’ll be able to work out your profit and possibly lower your total bill by making sure you have recorded all allowable expenses. There is software available that can be used to make filing your tax return easier and flag up any potential business expenses you might have missed. Do a little research, and you can ensure that you stay in the taxman’s good books when your hobby becomes taxable income.
Income, Expenses and tax submission all in one. GoSimpleTax will provide you with tips that could save you money on allowances and expenses you might have missed.
The software submits directly to HMRC and is the solution for the self-employed, sole traders and anyone with income outside of PAYE to file their self-assessment giving hints and tips on savings along the way. GoSimpleTax does all the calculations for you so there is no need for an accountant. Available on desktop or mobile application.
Freelance Heroes Portal Members receive a 25% discount here >> www.gosimpletax.com/freelance-heroes
Not a member, don’t worry you can view the software and try for free here >> www.gosimpletax.com/flhnon