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Liv's Additions

March 2023

Hobby businesses and paying tax

Good news, you can make money from your hobby! Bad news is you may have to pay tax! More good news though you might be eligible for the tax free trading allowance, read on to know more.

What is the tax free trading allowance?

To know whether the small business life is for you and if your hobby will make a sustainable profit or not, the government helps out starters, small hobby businesses by charging no tax on the first £1,000 (gross before expenses).

This means that you do not need to report it or pay tax on it. Plus there is also a £1,000 allowance for property income for those in the letting business.

But what if I earn more than £1,000?

That is great we want you to! Earning more than the £1,000 allowance means you have to register for Self-Assessment and pay tax on any profits but you have two choices on how to do this.

  1. Deduct the £1,000 allowance from your gross income (before expenses) and pay tax on the remaining, or;
  2. Deduct allowable expenses from your gross income, like businesses normally do, and pay tax on the profits that are left.

You can pick either one but a good idea would be to check which one will be more beneficial for you.

You can pick either one but a good idea would be to check which one will be more beneficial for you.

When should you go big and turn a hobby into a business?

Going from a fun loving hobby to a full fledged business can be tough and very overwhelming. You must consider profit, expenses, tax, marketing, admin, record keeping, stock and how you will sell your product or service.

If this works out and your product or service is ongoing and popular then you will definitely need to pay some tax.

We are always here to answer your questions, so feel free to contact us and ask!

Keeping good financial business records.

This is a crucial step so that you have a clear idea of your income and expenses so that you pay the right amount of tax.

Using software like Xero is a great and easy way to ensure all records are accurate, you can incorporate your bank account, send invoices and record expenses easily.

We also suggest having a separate bank account for business to differentiate between business and personal transactions.

Expenses: the down low

I have explained expenses quite a bit in my December blog and my February blog - so have a read of those to help you understand what you can and cannot claim.

Should you start as a sole trader or limited company?

This can sound very intimidating, we know so that is why we at Add Liv Ltd can help you turn your hobby into a HMRC-compliant start-up business.

If you are a sole trader, tax returns can be simpler but there are benefits to being a limited company - to discuss which is better for your business, give us a call and we can talk you through the pros and cons.

Last bits of advice

Starting a business is exciting, going from a hobby to a legit business can be daunting so we highly recommend talking to experts before you make that final step. Search for local lawyers, accountants, business advisors and even ask family friends. Have all the information to make an informed decision.

For all your accounting needs, we are more than happy to give you advice so do get in touch.