Where do you stand legally if you turn your hobby into a side hustle?

Have you started a money-making hobby? Planning to rent out your home while you’re on holiday? Or are you actively launching a side business while working? Find out where you stand legally – and whether you need to pay tax.

When does your hobby become a business? And how much do you need to tell HMRC (and when)? Jo White from Kreston Reeves and Victoria Regan from Rix & Kay explain your legal position and tax obligations.

Has your hobby accidentally become a business?

Lots of people have hobbies they enjoy – from baking or scrapbooking, to providing local tours or participating in sporting events. Not all hobbies will generate income, but some can, intentionally or by accident, become a side business.

One increasingly popular example (while not necessarily seen as a ‘hobby’), is letting spare space in your home. You might list your spare room on AirBnB perhaps, or time your holiday so you can rent out your home to people attending major events nearby, such as Wimbledon or a festival.

With any ventures like these it’s important to understand your legal and other obligations. These can range from making sure you’re covered by insurance, to disclosing your income to HMRC and paying any tax due.

And if you’re employed, then you need to make sure your hobby doesn’t contravene your employment contract if it starts to become more of a business.

What does the law say about side hustles?

So where do you stand legally if you embark on a side hustle while working?

It’s understandable to want (or need) to maintain your regular income from your job while launching a new venture. But before you get started you need to review the terms of your employment contract and company handbook, to make sure you won’t be breach by doing so.

For instance, if there is a non-compete restriction, check what type of work you are prevented from doing. It might be that there is nothing in your contract to stop you from starting your side hustle – as long as it is not in the same line of work as your day job.

Activities that are performed outside of work can be restricted by way of an outside business interests or devotion clause. It could also be considered a disciplinary issue if you take a second job in breach of your contract. Even if there is no such clause, may be an ‘implied’ duty of fidelity and confidentiality, which could be relied on in the event that your side hustle is in competition.

While an outright ban on side businesses may appear unreasonable, especially for part time workers or if your venture is entirely unrelated, you may need to get permission before you start.

It can also helpful for your boss to know, as there could be implications under the Working Time Regulations which prevent anyone from working more than 48 hours a week (unless they have signed an opt-out).

Employers are becoming increasingly more supportive of staff wishing to pursue their passion – as long as it doesn’t compete with their business, is operated outside of working hours and doesn’t affect your productivity and focus.

Where do you stand on tax with side income?

Income from a trade is taxable on the person undertaking the business. There are a number of ‘badges of trade’ which HM Revenue & Customs will look at when considering if your income is from trading, and therefore taxable.

These badges of trade ensure that you aren’t taxed on something that you have acquired for personal use and then sell on at a later date. So if you decide to sell your used baby clothes once your child has grown out of them, you don’t need to declare your income for tax.

However, if your motive in selling is to make a profit, or your transactions are more frequent than one-off or intermittent, then you will probably be considered to be trading. (It’s important to review all of HMRC’s badges of trade to make sure you’re not unknowingly trading.)

If you’re selling the odd birthday card or cake to a friend your income probably won’t be taxable. However, if you are regularly selling goods on eBay or going to markets and fairs with your products, then it is likely HMRC will want to tax any profit you make.

Your first £1,000 is tax free

In April 2017, HMRC introduced a new trading allowance to cover small, hobby businesses. This allowance means that the first £1,000 of gross (before expenses) trading or property income is tax free when you claim it.

If your taxable trading income exceeds this threshold then you have two choices as to how the allowance is accounted for:

  1. You can deduct the £1,000 allowance from your gross income and tax the rest.
  2. You can deduct allowable expenses from your gross income in the normal way.

You can choose the option that works most in your favour.

If you are eligible for the allowance and your income doesn’t exceed the threshold, then you don’t need to pay tax on your income, or even report it. But if you earn over the allowance then you may need to register for Self-Assessment and pay tax on any profit.

You also have similar £1,000 allowance for property income (this allowance isn’t available for income which would qualify for Rent a Room Relief). So if you have let out a room, your whole home or even just your driveway, and earned less than £1,000 you don’t need to do anything.

And if your property income exceeds the £1,000 allowance then you can again choose from the two methods of calculation to find the most beneficial option for you.

Make sure you keep track of your profits – and declare what you need to

What is clear is that HMRC have acknowledged that a number of us will be entrepreneurial in the way we use our skill and assets outside of our day to day work.

The use of the £1,000 allowance is designed to ensure that we are not penalised for this. However if your hobby does become a profitable side hustle, or the level of income generated is greater than you expected, it’s important to be aware of your obligations to ensure you don’t incur unnecessary costs down the line.

Jo White is a tax consultant at Kreston Reeves and Victoria Regan is an employment lawyer at Rix & Kay.

Photo by Andrew Neel