What if you could make money on your hobby? Good news! Numerous companies and side projects arise from simple hobbies and interests. You can also take advantage of the tax-free trade deduction.
Starting a side business from a hobby is a great way to test if entrepreneurship is right for you and if your hobby is profitable. The good news is that anything you do extra can be tax-deductible. HMRC has introduced a tax-free allowance to cover “self-start” with hobby-based small businesses.
If you earn more than the free allowance, you must enroll in the Self-Assessment and pay taxes on any profits. From then on, you have two choices:
- Subtract the € 1,000 surcharge from your gross income and pay the changing tax, or;
- Subtract eligible expenses from gross income, as businesses usually do, and pay tax on profits.
It’s up to you which one to choose, but you can only use one method at a time. You may want to find out what is most tax-efficient for you.
If you add up all of your expenses and they are less than the commercial deduction, it is cheaper to use the commercial tax deduction.
Doing something you love as a business is a very different experience than doing it for fun. Running a business involves taking into account profitability, costs, taxes, marketing, and administration, plus anything you intend to sell. And if your motive is to sell things at a profit, or if your sales are consistent or ongoing, then you may have to pay taxes on what you sell.
We know it sounds a little scary, but that doesn’t mean it’s impossible. As an online accountant, we’ve gathered some tips on how to turn your hobby into an HMRC compliant start-up.
When you start working on a regular basis, it is important to record all of your transactions so that your income and therefore taxes are clear and accurate.
With simple accounting software like Pandle, it’s as easy as linking your bank account, as transactions are automatically tracked. We also recommend opening a separate business bank account. This makes it much easier to distinguish between business transactions and personal transactions.
Once you start paying taxes, you can lower your tax bill by reporting expenses. A percentage of your profits are taxed (usually 20%). If you return a portion of this profit to the company, it will not be considered a profit in the eyes of HMRC. The amount you spend on expenses can be deducted from your profits and thus reduce the amount owed in taxes.
When you register as a self-employed person with HMRC, you need to decide whether you want to run a business as a sole proprietorship or a limited liability company.
Tax returns can be easier if you are the sole owner of a small business. This is suitable for most hobby-based businesses. However, some people prefer a company’s limited liability in case debt goes wrong and the ability to name more shareholders and pay dividends.
We also have guides to becoming a sole proprietor or limited liability company to help you decide which is best for you.
We always recommend that you seek out a professional to take care of your tax matters to calm your mind and free your time from navigating bills and tax laws. An accountant can help you become taxable as well as tax-efficient so you can save some money!
If you want specialist advice and someone to manage your accounts, request a free quote from us today to see how much time, stress, and money you can save.