I have a small hobby, do I need to pay taxes?

The first thing to consider is whether your hobby is just a hobby or actually a business. HMRC uses the concept of ‘badges of trade‘ to help assess whether an activity is a trade that needs to be taxed. The badges of trade include things like whether there is an intention to make a profit, the frequency and continuity of transactions, the way the activity is carried out, and whether there is a connection with an already existing trade.

HMRC will take the following nine badges of trade into consideration as part of their investigation as to whether a hobby is actually a trade or not:

➡️ Profit-seeking motive – is your only reason to sell things for profit?

➡️ The number of transactions – how many time have you carried out the transactions?

➡️ The nature of the asset – are you selling something that has no personal use to you?

➡️ Existence of similar trading transactions or interests – are you already running a business selling the same type of things?

➡️ Changes to the asset – do you alter the things you sell to make a higher profit?

➡️ The way the sale was carried out – do you sell things through an agent?

➡️ The source of finance – did you borrow the money to buy something to be then able to sell it?

➡️ Interval of time between purchase and sale – did you buy something and then quickly sell it?

➡️ Method of acquisition – did you inherit something and then sold it or you planned the purchase?

For example, if you sell handmade crafts occasionally, and only make a small profit, then it is likely that your activity is a hobby rather than a trade. However, if you buy raw materials in bulk, sell your crafts frequently at craft fairs or online, and make a profit with the intention of increasing your income, then it is likely that HMRC would view your activity as a trade that needs to be taxed.

If HMRC deems your activity to be a trade, then you will need to pay income tax and national insurance if you are a sole trader, or corporation tax if you operate as a limited company. It’s important to remember that even if your activity isn’t a trade, you may still need to pay a different type of tax, which is capital gains tax.