Do you make money from a hobby? Your earnings might be tax-free. Read our blog below to find out about the trading tax allowance, which will allow you to earn tax free money while doing something you love.
What is the Trading Allowance?
From 6 April 2017, the new Trading Allowance for individuals of £1,000 was introduced and applies for the 2017/18 tax year onwards. This allowance means that individuals with a trading income below the annual threshold may not need to report it to HMRC or pay tax on it.
How does it work?
If you are an individual with a casual or small part-time earnings from self-employment, for example people such as Uber Eats workers who work in the ‘gig economy’, or small-scale self-employment such as online selling (via eBay), then this allowance will be useful for you.
It means that:
• Individuals with trading income of £1,000 or less in a tax year will not need to declare or pay tax on that income.
• Individuals with trading income of more than £1,000 can elect to calculate their profits by deducting the allowance from their income, instead of the actual allowable expenses.
What are the implications of the Trading Allowance?
• If the expenses are less than £1,000, deducting the Trading Allowance will be beneficial, but if actual expenses are more than £1,000, deducting the actual expenses will give a lower tax bill and profit margin.
• If the income is less than £1,000 but the individual makes a loss, an election for the allowance not to apply can be made (in this case, the loss in the usual way and include the details on their tax return, meaning that the loss relief is not wasted).
Example – Income less than £1,000
Max enjoys making cards in his spare time, and he occasionally does this for his family and friends for a small fee. During 2018/19, he received income of £700, and his expenditure on card equipment was £300. As Max’s trading income is less than £1,000, he will not have to report it to HMRC or pay tax or national insurance contributions (NICs) on it.
Example – Income exceeding £1,000
Judy enjoys making personalised hampers to order in her spare time. In 2018/19, her income from hamper sales is £1,500 and she incurred expenses of £300. As Judy’s expenditure is less than £1,000, she will be better off if she claims the Trading Allowance. Her taxable profit is £500 (£1,500 less the trading allowance of £1,000).
What if you have more than one source of trading income?
Trading Allowance may work well for many small-scale traders, but when a person’s main source of income is from self-employment and their secondary income is from a completely small-scale business, care must be taken.
When considering the Trading Allowance HMRC will combine income from all trading and casual activities.
In the situation, where the allowance is claimed, the individual cannot claim for any expenditure, irrespective of how many businesses they have and how much their total business expenses are.
Example- More than one income source
Phillip is a self-employed electrician and has an income of £30,000 in 2018/19. His business expenditure for the year is £5,000. In his spare time, Phillip buys and sells Lego over the internet. During 2018/19 he received a net income of £1,000 from this source.
If Phillip claims the trading allowance against his part-time income, he will be unable to claim expenses of £5,000 against his electrician income, and his taxable profit for the year will be £30,000. If he doesn’t claim the trading allowance, his taxable profit for the year will be just £26,000.
You should calculate your income from your earnings to find out if you are eligible to claim Trading Allowance.
Overall, if you make money from a hobby then it is important to understand how the earnings can be tax-free. If you need to know more information, then please contact us.
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