Making Money Online: When A Hobby Becomes Taxable Income
A hobby is an activity performed for fun, whether
that’s making art prints of movie stills or teaching guitar basics on YouTube.
When this activity becomes monetised, that’s when you draw the attention of
HMRC and your hobby may be regarded as a business.
Once your income (not profit) exceeds the annual
trading allowance of £1,000, you need to declare this income to HMRC. However, if
the sole purpose of your activity is to turn a profit, then you’re running a
business and must advise HMRC once your annual income exceeds £1,000. Of
course, you might just be selling old clothes on the likes of eBay or Depop in
order to make a little pocket money, and if these are your personal possessions
then there is no need to report this to HMRC.
To help keep you on the right side of the taxman,
we’ve invited Mike Parkes from GoSimpleTax to explain this further – as well as outline
your next steps if you need to report taxable income.
What is the trading allowance?
If you’re selling across the likes of Facebook
Marketplace, Etsy or eBay in your spare time, then you have a set amount of
money you can earn before you’re required to tell HMRC. Specifically, you can
earn up to £1,000 a year tax-free. This is what’s known as your trading allowance.
To make sure you don’t exceed the amount, keep a log
of all sales made across each platform. This protects you in the event of an
HMRC investigation as well as helps you stay on the right side of your tax-free
£1,000. Of course, if you don’t have any other earnings aside from those you
get from your online selling, you won’t pay tax until you earn more than your
What is my Personal Allowance?
Allowance is the amount of taxable income you can make
before you incur Income Tax. It factors in employment earnings, rental income,
and any additional online trading profit you make – among other
sources. Therefore, if the items you sell online
result in less than £12,570 annually (the Personal Allowance as of 2021/22),
and you have no other sources of income, you won’t be charged any Income Tax.
Once you exceed that amount, you’ll be taxed:
20% on the portion of earnings between £12,571
40% on the portion of earnings between £50,271
45% on the portion of earnings over £150,000
The same is true if you pay tax through PAYE at your
current employed role and earn more than your trading allowance. You’ll be
charged Income Tax according to the total amount of taxable income that you
Do I have to file a tax return?
You have to file a Self Assessment tax return if you
exceed your trading allowance, regardless of whether or not you’re employed. In
it, you’ll need to report all the sales you’ve made along with any associated
business expenses. But before you do this, you’ll need to register for Self
Assessment. How you do this will depend on if you’re self-employed or not.
Once you’ve registered, you’ll receive a letter with your
Unique Taxpayer Reference (UTR) number on. This reference number is essential
to using HMRC’s Self Assessment service and takes 10 days to arrive, so
remember to register long before your deadline. Once it has
arrived, you’ll need to wait for your activation letter, which comes with your
activation code. Only when you have both are you able to file your tax return.
Can I lower my tax bill?
When HMRC treats your online selling as a business,
you’re free to enjoy the benefits of business expenses. Business expenses are
purchases you make that can be claimed back on in your tax return, provided the
purchase was for business purposes. For example, you may be able to claim on:
Office supplies – any stationery you use,
envelopes or printing costs
Delivery costs – postage and packaging costs
Website charges – either for your own website
or the fee of the seller site
Bank and credit card fees – charges incurred
from selling online
Marketing and advertising costs – any adverts
you may run on seller sites
You might even be able to reduce the cost of running
your home! A portion of your utility bills, council tax, and telephone and
internet costs can be considered a business expense, depending on the amount of time you spend using your house as a base for your online selling. All you
need to do is keep a log of the expenses you’re claiming, and store evidence
for them should HMRC ask for it, and you’ll potentially reduce your total tax
Getting the most out of your online sales
If your hobby tips slightly into business territory,
don’t panic. Registering for Self Assessment and completing your tax return is
straightforward provided you have the right tools and act early. If your sales
exceed £1,000, register as soon as you can, and ensure you keep records of your
income and expenses to include them on your tax return.
From there, you’ll be able to work out your profit and
possibly lower your total bill by making sure you have recorded all allowable
expenses. There is software available that can be used to make filing your tax
return easier and flag up any potential business expenses you might have
missed. Do a little research, and you can ensure that you stay in the taxman’s
good books when your hobby becomes taxable income.
Expenses and tax submission all in one. GoSimpleTax
will provide you with tips that could save you money on allowances and expenses
you might have missed.
The software submits
directly to HMRC and is the solution for freelancers, the self-employed, sole
traders and anyone with income outside of PAYE to file their self-assessment
giving hints and tips on savings along the way. GoSimpleTax does all the
calculations for you so there is no need for an accountant. Available on
desktop or mobile application.