I have a small hobby, do I need to pay taxes?
A question we commonly get asked as an accountancy and bookkeeping company is whether or not people need to pay taxes on their small hobbies. The answer is not always straightforward and depends on several factors. In this article, we’ll discuss what badges of trade are and how they help to assess whether a hobby is just a hobby or a trade that needs to be taxed.
Knowing whether you have legal responsibilities as a hobbyist can be confusing, but that’s where we come in…
We’ve put together this article to help you understand whether or not you need to pay taxes if you have a small hobby. If you have any questions or would like to talk with one of our experienced Oxford-based accountants, get in touch and let’s have a chat!
Is Your Hobby Just a Hobby or a Business?
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.
Can You Earn Money from a Hobby Without Paying Taxes?
If you earn money from your hobby, you may be able to use the trading allowance. The trading allowance is a tax-free allowance of £1,000 that you can earn from trading activities without having to pay income tax.
The trading allowance applies to individuals who earn money from trading activities, regardless of whether it is a hobby or a business. However, it is important to note that the trading allowance cannot be used in conjunction with other allowances, such as the personal allowance.
If you earn more than £1,000 from your hobby, you will need to register for self-assessment and declare your income to HMRC. You can also decide to turn your business into a limited company and then you would need to pay corporation tax.
It’s worth noting that if you have other sources of income, such as trade income from your employer for example, then you may need to pay tax on your hobby income even if it is below the £1,000 trading allowance threshold.
Whether you need to pay taxes on your hobby depends on whether it is deemed a trade by HMRC. The badges of trade help to determine whether your activity is a trade or just a hobby and if you earn money from your hobby, you may be able to use the trading allowance. As always, it’s best to seek the advice of a professional accountant to ensure that you are meeting your tax obligations and avoiding penalties.
At Joanna Bookkeeping, we can help support your business by explaining your legal requirements as a business owner or even as a hobbyist. If you want to avoid getting stuck in red tape and make sure everything is done correctly, then let us show you how!
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