Could you turn your hobby into a successful business?

Musical types buy and sell vinyl, write songs or make instruments. Arty types paint, take photographs or make ceramic pots. Sporty types cycle, go fishing or canoeing. Some write stories or poetry, while many others knit or sew, bake cakes, make jam or grow plants. 

Most of us have hobbies. They make life more enjoyable because they’re fun and they can benefit our physical and mental health. But for some, they can also generate a welcome few extra quid.

Can I turn my hobby into a business?

Research carried out by insurer Hiscox in 2022 suggested that 23% of sole traders had turned their hobby into a business. Many people now run “side-hustle” businesses, often selling on such platforms as eBay, Etsy and Amazon after turning their hobbies into lucrative cash-spinners. 

But not everyone has what it takes to run a successful business, no matter how much they love doing something. And sometimes a hobby is best suited to a spare-time business. However, hobbies can be turned into successful full-time businesses, enabling people to jack in their jobs and earn a living from their hobby or passion. 

A less risky option might be to launch as a spare-time hobby business, and see how it goes before deciding whether to launch full time. Caution is also advised, because doing something for money can be a lot different to doing it purely because you love it.     

Caution is also advised, because doing something for money can be a lot different to doing it purely because you love it.     

How much can I earn from my hobby before paying tax?

UK tax authority HMRC allows you to earn up to £1,000 of tax-free income from a hobby business. This is called your Trading Allowance. So, if you’re earning less than that a year, you won’t have to register your hobby business or pay any tax. But if you earn taxable income of more than £1,000 in a tax year (6 April to 5 April), you’ll need to register so that you can pay tax.

If you earn money from more than one hobby, the total taxable income from them all cannot be more than £1,000, if you want to avoid having to register and pay tax on your income.

How do I register my hobby business for tax?  

• Most people who need to report hobby business income to HMRC register as a “sole trader”, which is basically where you run your own self-employed business. 

• As a sole trader, in law, you and your business are the same thing, so you’re personally liable for business debts. To avoid this, you can set up a limited company, but that requires more tax admin and cost.

• If you haven’t done it before, you must register for Self Assessment before 5 October in your business’s second tax year (6 April until 5 April), otherwise HMRC can fine you. 

• Visit government website GOV.UK to register for Self Assessment.

If you haven’t done it before, you must register for Self Assessment before 5 October in your business’s second tax year (6 April until 5 April), otherwise HMRC can fine you. 

How much tax will I pay on my hobby business income?

Once your hobby business trading income goes over £1,000, if you’re earning more than the Personal Allowance (£12,570 in the 2022/23 tax year), you pay Income Tax on your “net profits” (ie total sales minus allowable tax expenses), with tax allowances also accounted for.

The amount of tax you pay is determined by the Income Tax band your taxable income falls into. Your taxable income can include income you earn from other sources (eg share dividend payments, rental income, pension payments, etc). 

• You’ll pay the 20% basic rate of Income Tax if your annual total taxable income is £12,571-£50,270.

• You’ll pay the 40% higher rate of Income Tax if your annual total taxable income is £50,271-£125,140.

• You’ll pay the 45% additional rate of Income Tax if your annual total taxable income is more than £125,140 (2023/24 for all figures; Income Tax bands and rates are different in Scotland).

Do I pay National Insurance on hobby business income?

• If your hobby business income is more than £12,570 a year, Class 2 National Insurance contributions (NICs) of £3.45 a week are payable. If it’s £6,725-£12,570, you don’t need to pay Class 2 NICs, but you still receive the benefits that come from paying them. 

• Class 4 NICs of 9% are payable on profits of £12,570-£50,270, with 2% payable on profits above £50,270.

What tax expenses can my hobby business claim?

To reduce your tax bill, potentially, there are many tax expenses that your hobby business can claim, including:

• machinery and equipment

• stock or raw materials 

• packaging and print

• broadband and phone

• travel (ie fuel, parking, train or bus fares)

• premises (ie rent, heating, lighting, business rates, etc)

• postage and office stationery 

• marketing and advertising costs 

• bank charges, insurance

• professional membership fees

• wages and professional fees paid to others 

• safety clothes and business-branded workwear.

If you run your hobby business from your home, you’ll probably be able to claim for some of your heating, electricity and water costs, Council Tax, mortgage interest or rent, broadband and telephone use. Alternatively, you may be able to claim a flat rate.

You can only claim for genuine business costs. There can be severe consequences if you conceal taxable hobby business income or make fraudulent expenses claims. If you use something for business and personal reasons (a mobile phone being a classic example), you can only claim business use costs as an allowable tax expense.

There can be severe consequences if you conceal taxable hobby business income or make fraudulent expenses claims. If you use something for business and personal reasons, you can only claim business use costs as an allowable tax expense.

Will my hobby business need to register for VAT?

• If your sales that were subject to VAT in the past 12 months were more than £85,000 (the VAT threshold for 2023/24) or you expect them to be more than £85,000 in the next 30 days, you must register for VAT. That is more likely if your hobby business is full time and very successful. You register for VAT via government website GOV.UK.

Will my hobby business need to keep tax records? 

If you need to register your hobby business and pay tax, you must maintain accurate, up-to-date records of your sales and costs, with exact figures and dates, so that you can complete your Self Assessment tax return and evidence your income and costs should HMRC ask you. HMRC can fine you if your records are not accurate, complete and legible. Also keep receipts and invoices for things you claim as tax expenses. 

How do I report my hobby business income to HMRC?  

You complete a Self Assessment tax return each year, the main SA100 tax return and the SA103 supplementary page, summarising your hobby business income, as well as all expenses and allowances you claim. 

You can file your Self tax return any time after the tax year finishes on 5 April, although the annual deadline for filing your Self Assessment tax return online is midnight on 31 January. A £100 fine is payable immediately if you miss the filing deadline. 

After HMRC receives your tax return, it will tell you how much tax you owe. The deadlines for paying your tax bill are usually: 31 January for any tax you owe for the previous tax year (known as a “balancing payment”) and your first “payment on account”; then 31 July for your second payment on account.

• This blog was produced for GoSimpleTax, award-winning software that makes completing a Self Assessment tax return much easier, quicker and cheaper when compared to using an accountant.

20 financial terms that every small-business owner should know and understand

They’re words or terms that are frequently used in business. Many of them you possibly already use or often hear. But do you know the actual meaning of them all?  

1 Accounting period 

This is the period to which a business’s financial accounts refer, which is usually 12 months. You can compare headline numbers from different accounting periods to assess how well your business is performing or developing.

2 Accounts payable

This is an accounts/bookkeeping record of money owed by a business to its suppliers. This is shown as a liability on a business’s balance sheet (see 4). “Accounts receivable” is a record of money owed to a business by its customers.

3 Assets

These are items of value that a business owns. They can be physical, tangible things, such as machinery, tools, vehicles, premises, computers, office furniture, etc, or non-physical, intangible things, such as intellectual property, brand identity, “goodwill” (ie reputation), customer base, in-house systems, etc. Both can be important when valuing a business for sale.

4 Balance sheet 

A balance sheet is a financial statement that shows a business’s assets and liabilities at a given point, while detailing shareholder equity (ie the amount shareholders would receive if a company’s total assets were liquidated and all debts repaid). Bottom line is the last line on a balance sheet that shows total profit or loss.

5 Cash accounting 

Cash accounting is an accounting method that records income when it’s received and expenses when they’re paid. The alternative is the accrual accounting method, which is where income and expenses are recorded when they’re earned/incurred, regardless of when cash actually enters or leaves a business. There are pros and cons to each.

6 Cash flow

Cash flow (or cashflow) describes the relationship between cash entering and leaving a business. Positive cash flow means more cash entering a business than leaving it. Cash-flow problems arise when you spend more than you make or when you don’t have sufficient cash to pay your short-term debts. Poor cash-flow management can kill even profitable businesses.

7 Credit control

Firstly, this requires managing which customers get credit from your business and how much they get. Credit control also involves monitoring customer accounts and prompting them when necessary to ensure that they pay their invoices when due. 

8 Creditor 

An accounting term used to describe a person or business to whom/which your business owes money. Your suppliers can be described as trade creditors. A debtor is a person or business that owes money to your business.

9 Double-entry 

A bookkeeping system whereby every time you detail a transaction it’s recorded in two places within your accounts, once as a debit and once as a credit. The double-entry system can make it easier to prepare accurate financial statements and identify errors.

10 Gross profit  

This is your turnover (see 18) minus your cost of sales and direct costs. Your gross profit margin/percentage = gross profit/turnover x 100. So, if your business made a gross profit of £30,000 on a turnover of £75,000, its gross profit margin/percentage would be 40%.

11 Income

This is money that you or your business receives in exchange for your labour or supplying goods or services. Income can also be earned through investment. Revenue is an alternative name for business income. Net income is income minus cost of goods/services sold, expenses, depreciation and amortisation, interest and tax.

12 Inventory

This is simply another word for materials or stock that a business buys to sell or make into products for sale. Inventory is reported as a current asset on a company’s balance sheet.

13 Markup

Margin is sale price minus the cost of goods/services sold. So, if you sell a product for £100 and it costs you £70 to make, your margin is £30 (or 30% margin percentage). Markup is how much you add to your costs to reach your selling price. So, a markup of £30 from your £70 cost gives a £100 price, but the markup percentage is 42.9%, which is the markup amount divided by your costs.

14 Net profit 

This is your gross profit (see 10) minus your indirect costs and expenses. So, if your gross profit is £30,000 and your indirect costs and expenses are £10,000, your net profit is £20,000. Your net profit percentage = net profit/turnover x 100. So, in this case, £20,000/£60,000 x 100 = 33.3%.

15 Overheads 

Overheads are your day-to-day running costs, such as rent, rates, etc. Sometimes these are called “fixed costs”, because they don’t change regardless of how much you make or sell. However, your “variable costs” will increase if you make or sell more. Raw materials are the most obvious variable cost.

16 Petty cash 

This refers to small amounts of cash belonging to a business that is kept for low-value day-to-day purchases, such as a bottle of milk, tea bags or jar of coffee. Obviously, petty cash purchases must be accounted for.

17 ROI

Return on investment. Basically, the financial rewards your business gets back from things it invests in, for example, a marketing campaign, new website or new item of equipment. The formula for working out ROI as a percentage is net profit/total investment x 100. Doing such calculation enables you to work out how effective an investment proved.   

18 Turnover 

This is one of the most common words in the business lexicon. Turnover simply means the total value of sales made, usually in a year. Sometimes the word revenue is used, but it has the same meaning. A small price increase can make a big difference to your turnover.

19 Working capital 

This is the amount your business needs to operate day to day. It’s easy to work out how much working capital you need. You simply take your current liabilities (accounts payable – how much you owe) away from your current assets (ie your available cash, accounts receivable, inventory and short-term investments).

20 Year-end 

This refers to the end of a company’s accounting or financial year. It is known by the alternative name of accounting reference date (ARD) and is on the last day of the month during which the company was registered with Companies House (although it can be changed).

• Read the Companies House guide to accounting reference dates and periods.

Why small businesses need accountants more than ever

About five years ago, I first began to read predictions that traditional accountants could soon find that their number was up. According to reports, accountants were literally living on borrowed time, because of technology’s relentless advance. I’ve even had accountants tell me this recently.

In 2014, it was estimated that almost half (47%) of job categories could be automated within two decades, with accountants and auditors high up on the endangered list. Technology would be able to complete most of their duties and tasks, faster, better and at a far lower cost, some sources predicted.

End game

In the coming decades, some believe automation will kill the accounting profession as we know it. Accounting software companies continue to add more automation to their wares, impacting manual accounting processes and slowly but surely removing the need for accountants and bookkeepers to take care of many simple tasks.

With little knowledge, freelances, contractors, sole traders and micro-business owners can now use apps that allow them to conveniently manage their expenses, invoicing and tax from their smartphones. Such apps provide data that makes filling out tax returns much easier.

They can be connected to current bank accounts and credit card accounts – while some apps even offer their own business current account. And they target accountants, encouraging them to get their clients to become users, so that accountants are freed from mundane tasks and can contribute value in other ways (well, that’s the marketing spiel, anyway).

“Many business owners may not be as tech-savvy as you believe. According to ONS data, only 48% of UK businesses have a website. ”

Cause for comfort

Some say it’s inevitable that in the future, tech rather than accountants will advise business owners on finance, funding, tax and other matters. Small-business owners may be able to use chatbots, for example, to have their questions answered in real time, for free or at low cost, rather than having to meet or call a flesh-and-blood accountant (and pay for the privilege).

Accountants are offered some crumbs of comfort in this brave new future world, because although there will be fewer accountants and accountancy firms, those still standing will take on more strategic and analytical roles, we’re told. Time will tell.

No one knows the extent to which technology will impact accountancy or how soon significant change will come. And many UK business owners may not be as tech-savvy as some would have you believe. According to the most recent ONS data, only 48% of all UK businesses have a website. The figure for micro-businesses is just 45%.

“Many people – especially older business owners – aren’t going to be using chatbots to have their business queries answered any time soon”

Vital role

Although research suggests that 100% 16-24 year old use their mobile phones to get online, more than a quarter (27%) of 55-64 year old do not use their mobile phone to get online, while neither do 40% of mobile phone users aged 65-plus. About 14% of people in the UK aged 60-plus now run their own business, either full time or part time, with a further 9% freelancing. So, we see that many people – especially older business owners – aren’t going to be using chatbots to have their business queries answered any time soon.

Clearly, accountants still have a pivotal role to play in ensuring that the UK’s 5.9m SMEs are kept well informed and expertly advised. Never more has that been truer than this year, of course when many micro and small businesses have relied on their accountants to help them negotiate their way through furloughing and tax and business rate changes. Small businesses also needed to know about government grants and loans, as well as how to cut costs and keep their cash flow healthy.

Throughout the UK, the best accountants and accountancy firms reached out regularly to their small-business clients, to give them life-saving guidance in the most challenging of times. With the economy in an alarming state, things still far from stable because of Covid-19 – and with the Brexit transition period ending early next year – small businesses need their accountants more than ever. Who else can they rely on?

• With 15 years’ experience as a leading writer of small-business content, Mark Williams is the founder of Dead Good Content, which specialises in producing cost-effective bespoke and readymade content for accountancy firms and other organisations that want to market their services to small businesses.