How HMRC taxes hobbies and side hustles

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Whether you’re simply having fun, testing out the waters on whether you can turn your hobby into your dream job, or just looking for convenient ways to earn some extra money, you should know that you may have to pay tax on your earnings. HMRC are able to receive your financial information through various methods and sources, so they will be able to determine whether you should be declaring any extra income to be taxed on it. This article explains when and how HMRC will seek to tax your hobbies and/or side hustles.

What’s the difference between a hobby and a side hustle?

A hobby is defined as an activity you do in your own leisure time for enjoyment, such as golfing or gardening. Some hobbies may allow you to benefit further where you’re able to make some money by selling your own goods or services. Perhaps you have a passion for arts and crafts and sell pottery pieces or drawings, or you may be an outstanding baker that sells cakes or confectionary from time to time.

The term “side hustle” on the other hand was first used in the 1950s when people struggled to find jobs and so turned to more entrepreneurial measures to make money. It was a phrase used to refer to both fraudulent and legitimate opportunities. In more recent times however, the use of the term side hustle has become mainstream in language and used to mean ways to make passive or convenient income, often on the side to a main job.

Having said that there can certainly be an overlap between the two such as those earn money through being a social media influencer or content creator. For the purpose of this article, we’ll use hobby to describe an activity that is predominantly completed for personal enjoyment and coincidentally allows you to make money. Whilst the term side hustle will be used to refer to the intended pursuit of making easy earnings.

Why does HMRC tax hobbies and side hustles?

In the UK, every individual is entitled to their personal allowance of £12,570. This is the amount of money one can earn without having to pay any income tax. Any earnings over this, regardless of how they are made then become liable to income tax at your personal income tax rate. The exception to this is where you earn over £100,000 per tax year as you begin to lose £1 for every £2 of income over this threshold until your entire personal allowance is reduced to zero. Gambling and lottery winnings are exempt from income tax because they are not classed as earnings; however, money made from hobbies and side hustles do.

How much can I make through my hobby before I have to pay tax?

If you make any money through a hobby, then you’re allowed to earn up to £1,000 each tax year without being taxed. You’ll also not be subject to National Insurance (NI) contributions on these earnings. The £1,000 threshold is known as the trading allowance and is specifically designed for people who make casual income every now and then on the side of their normal main income.

However, if you are not working at all and rely on the money made through your hobby as your sole source of income, then you will be able to earn a total of £13,570 without incurring a tax liability. This is made up of both the personal allowance and trading allowance. Be aware that in this instance you may have to complete a self-assessment tax return to declare your earnings although you still won’t have any tax to pay.

How does the trading allowance work?

The trading allowance is available to every individual in the UK. It works by allowing you to make up to £1,000 in miscellaneous earnings each tax year without incurring income tax or NI. When using trading allowance, you must account for your gross earnings, which is your earnings before any expenses have been deducted. This is not always immediately obvious, especially where you sell your goods or services through digital platforms that may take a percentage of your sale as a commission fee charge. For example, as a side hustle you offer proof reading skills through a digital platform that helps you find clients. The platform charges a 10% commission fee so although you earn £600 worth of work in the year, you receive £540. Your gross earnings covered by the trading allowance in this instance would be £600.

If you make less than the full trading allowance of £1,000 then you will receive full relief. This means none of your casual earnings is taxable. However, any amount left over does not create a trading loss that can be offset against prior year or future years. It simply remains unused. Where you make more than the trading allowance, this does not disqualify you from claiming it. Instead, you can receive partial relief. This means that you can claim a maximum of £1,000 from income made from your hobby or side hustle as tax-free. For example, you’re a basic rate taxpayer and as a hobby you sell homemade art sculptures. You make £1,150 in a year and claim partial relief through the trading allowance. This means that only £150 is subject to 20% tax and you would need to complete a self-assessment tax return as well as pay £30 in taxes. Don’t forget though, if your earnings push you into the higher tax brackets, you’ll still be able to claim the trading allowance, but you’ll be subject to higher rates of income tax.

When you claim the trading allowance, you won’t be able to deduct any expenses you incur. This is why it is often used by those who make casual income through their hobbies or side hustles. You also won’t be able to claim for any pre-trading expenses, so is not suitable for those who are spending to set up a full-time business. However, the trading allowance can be very beneficial to those who have very low expenses. As an example, say you earn money on the side by house sitting for your neighbours. You make £400 in a year and only spend £25 on travel. When you claim trading allowance, you pay no tax at all so make £375 profit. Without the trading allowance, you can claim your £25 travel expenses but would also have to pay £75 in tax, so would only earn a total of £300.

How much can I earn from my side hustle before I have to pay tax?

The same rules apply to those with a side hustle as they do to those who earn a bit of extra money through their hobbies. With a side hustle however, it’s more  implied that you have a main job and so are therefore more likely to already be fully utilising your personal allowance. Nevertheless, those with a side hustle are still entitled to use the trading allowance in the same manner and earn up to £1,000 tax-free on top of their personal allowance.

If you’re looking for a side hustle that can earn you even more money tax-free, then you may want to consider the following:

• The Rent a Room Scheme – the rent a room scheme enables you to earn up to £7,500 per year tax-free simply by letting out a room in your house. It must be furnished, and you must be living in the home for it to apply, but you do not need to be the homeowner so long as your tenancy agreement allows you to sublet. If you share the rental income with your partner or someone else, then you’ll each only be entitled to £3,750 tax-free (you can’t both claim £7,500 for renting a room in the house you share). If you earn more than £7,500 a year by letting out a room in your house, then you’ll have to complete a self-assessment tax return and pay tax at your income tax rate on anything over.
• Use your annual capital gains tax (CGT) allowance – Each tax year, you’re entitled to a CGT allowance which enables you to sell valuable assets and make a profit tax-free. The CGT allowance for 2023/24 is £6,000 but this is due to decrease to £3,000 in April 2024. Common items you can sell or auction to use your CGT allowance include jewellery, antiques, collectibles and even cryptocurrency. Don’t forget that CGT only applies to your profits, not the total of your sales. If you sold a watch for £12,000 that was originally worth £8,000 then you would have no CGT to pay because your profit is £4,000 and within the allowance. Any gain made over the allowance is subject to CGT at your personal income tax rate. Married couples and civil partners benefit by being able to transfer assets to each other tax-free for the other to dispose of and therefore enables you to use both CGT allowances.
• Collect and sell items that are not subject to CGT – Some assets can be sold for a profit without attracting CGT because they are considered outside the scope. Many of these types of assets are described as ‘wasting assets’ which are those which do not have a life expectancy of more than 50 years. Examples of these are private-use cars, including classic or vintage cars, caravans, pleasure boats and whiskey. However, an important part of these disposals must be that they do not amount to a trading activity. This means that HMRC cannot have reason to suspect that these assets were acquired simply to be sold for profit. They’ll determine this on a number of factors including how long an asset has been in your ownership for and the frequency of your disposals.

If your side hustle involves you being employed by an employer, then you may want to find out how you’ll be taxed on a second job. Where all your earnings are taxed at source (which they will be if you’re employed and on the employer’s payroll) then you will not need to complete a self-assessment tax return. 

Do I have to register my hobby or side hustle as a business?

There is no legal obligation for you to register your hobby or side hustle as a business. However, if you are going to use the trading allowance and your earnings are over this limit, then you must register as self-employed. Doing so enables you to complete a self-assessment tax return, claim the trading allowance, and pay taxes on the excess amount.

If in the following year you do not exceed the trading allowance, there is no need to de-register as self-employed. In fact, you will automatically remain registered as self-employed and be required to complete a self-assessment tax return each year, even if there is no tax to pay. Only consider informing HMRC that you wish to no longer be registered as self-employed if you no longer earn any income through your hobbies or side hustle.

Can I claim for expenses from my hobby or side hustle?

You can claim for expenses that are because of generating income from a hobby or side hustle so long as you forgo using the trading allowance – you cannot claim both. Surrendering the option of claiming the trading allowance can be more beneficial if you have large expenses.

For example, say you teach a cookery class once a week during term time evenings and charge £35 per head with a class of 10 people. Your expenses are £150 per week to cover the cost of ingredients, equipment, and venue hire to host the class. Your expenses would far exceed the trading allowance at £5,850 if you were to run your classes across 39 weeks.

We would therefore advise you to claim your actual expenses and pay tax on your profits. This is calculated by deducting your expenses from your total sales and then applying your income tax rate. In this example it would be £13,650 (calculated from £35 x 10 x 39) – £5,850 (calculated from £150 x 39) which leaves £7,800 subject to 20% basic rate income tax. You would need to pay £1,560 in tax.

If you were to use the trading allowance, you would only be able to deduct £1,000 from your £13,650 earnings and therefore need to pay tax on £12,650. Your tax bill by opting to use the trading allowance would be £2,530 which is £970 more than the above.

*Note that the illustrative example above has not included calculations for Class 4 NI contributions.

Do I have to charge VAT on my hobby on side hustle?

You only have to charge VAT when selling your goods or services from your hobby or side hustle where they are not VAT exempt and your annual turnover from these earnings are £90,000 or over. In most normal situations, this is highly unlikely to be the case and more of a possibility if you are running your own business. However, you can still choose to voluntarily register for VAT even if you are not at this threshold. This may be beneficial if you have high expenses that incur VAT as it will enable you to reclaim your VAT payments. Nevertheless, before going ahead, you should consider whether doing so is worthwhile for casual earnings. Once you register for VAT, you must complete regular VAT returns and this significant increase in administrative obligation may not be reasonable if there are only small gains received.

What is the hobby tax?

As of 1 January 2024, it has been made mandatory for digital selling platforms such as Etsy, Vinted, eBay, Uber and Airbnb to automatically report personal and financial data on their users direct to HMRC. This will enable HMRC to cross reference between this information and the personal tax returns it receives or does not receive to ensure everyone is fully declaring their taxable earnings and income.

Previously, HMRC already had the power to request this information from digital platforms, but the new change now puts the responsibility on the digital platforms to disclose their users’ details automatically. The rule will specifically target those users who sell 30 or more items a year, or have total earnings of £1,725 or more.

As such, it’s fair to conclude that there is no new hobby tax. The tax rules for individuals have not changed. You are still entitled to make earnings up to the trading allowance tax-free and without having to complete a self-assessment tax return if you are not already obliged to do so, have not gone over the trading allowance, and are already utilising your full personal allowance through employed income.

You are still free to sell your unwanted items such as household goods as more often than not, it will be unlikely that you will be making a profit and therefore not subject to tax. If, however you buy and sell second hand items with the intention of turning a profit using these digital platforms, then you should be aware that HMRC may request for you to start completing self-assessment tax returns, even where you may not necessarily have any tax to pay.

Get help with your hobby or side hustle earnings

If you’re earning over the trading allowance through your hobby or your side hustle, then you will need to complete a self-assessment tax return. Speak with one of our expert accountants who will explain what needs to be done, including registration if you have not done so already, and help you calculate how much tax needs to be paid. Furthermore, if you’re thinking of turning your hobby or side hustle into a full-time business, we can advise as to what business structure may suit your needs. Use our contact form to get in touch.