By Lyndsey Hall
In April, HMRC will introduce a new tax exemption encouraging people to earn up to £1,000 per year from their hobbies and micro businesses.
Under the new trading allowance, earnings under the threshold won’t need to be declared to the taxman, but once you earn over £1,000 you’ll need to pay income tax on your full profits, including that first £1,000.
HMRC has said that if you’re starting a new self-employed business and don’t expect your gross income to be more than £1,000 you won’t have to register for self-assessment.
This means that people who sell cakes and buns or crafts on sites like eBay and Etsy will be able to do so without the fear of being taxed. ‘Casual services’ such as gardening and babysitting will also be exempt, and won’t have any paperwork to do. You should always keep a record of costs and expenses for future reference, in case you do end up exceeding the threshold in a tax year, and become liable for income tax.
Other examples of hobbies that don’t incur tax include brewing cider – you can brew up to 12,000 pints per year, which equates to 7,000 litres or 1,500 gallons, without paying a penny in alcohol duties. The exemption was introduced in 1976 to encourage farmers to keep small orchards and preserve habitat for wildlife. It came under threat two years ago when the EU tried to axe the benefit, but following fierce opposition it remained in place.
Collectors of classic cars can also avoid Capital Gains Tax (CGT) when selling cars from their collection as profits from selling any car, old or new, are generally not taxable. The clause is designed for genuine hobbyists, not those who buy cars intending to sell them, so as long as you avoid the following hallmarks of a trader you can sell your vintage cars tax free:
- Frequency of sales – one-offs are fine, regular sales are not
- Length of ownership – buying a car one week and selling it the next looks suspicious to HMRC
- How it was acquired – inherited the car? You’re probably not a trader
- Motive for buying – if you’re a big collector you’ve got nothing to worry about
You can also avoid paying CGT on ‘wasting assets’, or anything with a life span of less than fifty years. This includes fine wine, antique watches and clocks, machinery, etc. Wines are considered ‘perishable’, they tend to reach peak maturity after twenty five years before declining. Fortified wine however is not exempt, as it can withstand more significant ageing than fine wines.
Personal possessions sold for less than £6,000 are also exempt from CGT, including jewellery, paintings, antiques, coins and stamp collections. As long as the taxman doesn’t suspect you bought the goods with the intention of selling them for profit, you can avoid paying between 10 and 20 per cent tax.
Rent-a-room relief means homeowners can earn up to £7,500 per year tax free just by taking a lodger. Many use the allowance to let their homes on short-term holiday rental sites like Airbnb, but this isn’t what the relief was originally intended to be used for, the idea was to encourage more people to take in lodgers. The Government is considering banning homeowners from using it for short-term lets, so keep an eye on legislation if you currently rent your home out to holidaymakers. Currently, up to 52,000 Brits use Airbnb, and the average host makes £2,000 a year – £3,000 in London. You can choose to let a single room or your entire home.
The new property allowance introduced this month allows people to earn £1,000 tax free from their property per year, such as renting out your driveway or parking space (very popular in towns near airports, or housing estates near train stations). You could even rent out your empty loft space for storage, or your kitchen for filming cookery shows. There’s no need to inform HMRC as no tax is owed, but as with the new trading allowance, if your gross annual income exceeds £1,000 you’ll have to submit a self-assessment tax return and pay tax on the entirety of your profits.
Have you tried any of these sources of secondary income? Let us know what you do to boost your earnings tax free, leave a comment or find us on Twitter.
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