Nowadays, most people utilize their hobbies to earn money. However, it can be confusing to understand if they are supposed to file up for a side business tax return UK. Now, the income from things like crafts or activities like baking, tutoring and digital works might be small but HMRC has rules for that too.
Likewise, if your hobby is earning you significant money then you have to report it.
When a Hobby Becomes a Business
We all want to turn our hobbies into a business for some extra income. This is the reason that HMRC checks how often you sell and organize your income. In that way, whenever your income from such sales goes beyond £1,000 in a tax year - It's not just a hobby anymore.
It happens because of the HMRC trading allowance, allowing you up to £1,000 as secondary income without reporting it. For complete details on how the trading allowance works and what qualifies as trading income, visit HMRC's trading and property allowances guidance.
What the Trading Allowance Means
With a trading allowance, you can earn up to £1,000 from all your secondary income sources. As, it covers your total income and not only the hobby. Whereas, if your income is below the limit then there’s no need to complete self-assessment for hobby income.
Furthermore, if your income goes adobe then you may be required to pay extra income tax UK based on your total earnings. Understanding whether you need self-assessment or Making Tax Digital is crucial as your side business grows. Learn more in our guide: Do I Need Self-Assessment or MTD for Income Tax UK?
When You Should Register for Self Assessment
As mentioned before, passing the £1,000 limit makes you eligible to register as self-employed. Afterwards, you will have to file a side business tax return UK each year.
Now, the deadline for registration is 5th October after the end of tax years. So, this clearly answers the question - when to register for self-assessment?
Hence, you have to report as fast as possible if your income goes over trading allowance. Confused about whether you need to register or how to file your side business return? TaxSimba can assess your situation and handle all the paperwork, so you can focus on growing your hobby into a thriving business.
Keeping Basic Records
So, if your hobby becomes your primary source of income like a business, then keeping good records is a must. That’s why you must track all your income and expenses accordingly.
For ease, you can use compliance registered online applications to log your records. Many people even use separate bank accounts for better clarity. With clean records you can file your side business tax return UK without any stress.
Claiming Allowable Expenses
As businesses pay their tax only on the profits, you can also deduct the material, tools and subscription costs. For instance, selling an item for £20 while spending £5 on raw-materials will require taxation only on the £15 profit.
Conclusion
Finishing up, converting you hobby into business requires strategic planning for accurate tax benefits while staying compliant. So, always start small and then scale accordingly.
For more information and guidance, let TaxSimba take care of your Self Assessment.