What if your passion could earn you money? Good news! Many businesses and side projects started out as straightforward pastimes or interests.

From graphic design to woodworking and all points in between, it seems that more and more people are launching side businesses in their free time. For some, it’s an opportunity to test the waters before launching their own business or to augment their income with an existing hobby.

When does a hobby become a company?

One of the best ways to find out if the entrepreneurial lifestyle is right for you and whether your activity is profitable is to start a side business based on a hobby. Generally speaking, your business is regarded as a company if you offer goods or services and earn more than £1,000. The fixed amount of the trade allowance is £1000.

What is the allowance for tax-free trading?

It was created by HMRC as a tax-free allowance for “self-starters” who operate small businesses centered around hobbies. Generally speaking, your business is regarded as a company if you offer goods or services and earn more than £1,000. The fixed amount of the trade allowance is £1000. We say ‘a total of’; if you have a lot of side projects (which is acceptable), you won’t get a separate Trading Allowance for each one!

What occurs if my income surpasses the tax-free threshold?

If you make over £1000 in a single tax year, congratulations! Regretfully, it’s also time to let HMRC know. Financial fines and other backdated tax costs are often the consequence of a business’s late registration.

If my profits surpass the trade allowance, will HMRC be notified?

HMRC may find out whether you inform them or not, depending on how you make your self-employment income! Money received by certain online firms must be automatically reported to HMRC at the end of the year in accordance with the reporting rules for digital platforms.

For instance, HMRC may receive this information if you sell on Etsy, but as long as you follow the tax reporting standards, you are not obliged to take any more action!

Which business structure is best for my side project?

You must select a legal structure when registering your business because “side hustle” does not correspond to one. Depending on your situation, each has different benefits and drawbacks, so before choosing one, do some study or speak with an accountant or business mentor.

Self-assessment as single traders is the most common approach for people to launch a side business. This is quite easy to set up, there is no cost, and unlike a limited business, your information won’t be shared with the public. As always, though, it’s crucial that you pick the structure that works best for you!

Sole traders are eligible for the Trading Allowance. It’s important to remember that you might still be able to claim tax savings on your earnings by using the Trading Allowance if you decide to become a sole proprietor. In essence, you have two choices:

You can either deduct the £1,000 allowance from your gross income and pay taxes on the difference, or you can tax the profits after deducting allowed expenses like business expenses. Any strategy will work, but only one at a time. You may want to figure out which one will save you the most money on taxes. You will gain more by deducting the trading allowance from taxes if your overall expenses are lower than the allowance.

Should I go into business to follow my passion?

Profitability, costs, taxes, marketing, and operations must all be carefully considered when running a business. Additionally, you might be required to pay taxes on the goods sold if your sales are consistent or regular. This could seem overwhelming, but it is not impossible.

To ensure that your income and, consequently, your taxes are accurate and transparent, you must maintain bookkeeping records that detail all of your transactions as soon as you begin a regular work.

It’s as easy as connecting your bank account to simple bookkeeping software, like Pandle, and having transactions emailed automatically. To make it easier to distinguish between business and personal expenses, some people would rather open a separate bank account for their company.

Get your allowed spending back!

Since businesses pay taxes on their profits, the amount of profit and, in turn, the amount of tax due are determined by reporting expenses.

For larger orders, double that by the total number of their clients. The difference could be rather big in some situations!

If you are looking for an accountant to help you with your queries related to your business accounts, Call at 020 35765107 or send a message to book a free consultation. Learn more about our online accounting services and pricing.

Note: It must be noted that the information provided in all our blogs are solely for the awareness purposes and are designed with the intention to create an ease for the reader to understand the rules and their importance. However, it should never be considered as an ultimate replication of rules. RezEx Accountants (RezEx Ltd) does not own any responsibility for any unpleasant event that may arise due to misinterpretation of a specific part or whole of the information.