Do you pay Tax on Small Earnings in the UK?

Here’s a really commonly asked question, do you pay tax on small earnings in the UK? So for example income from YouTube, eBay, Amazon and Etsy? Well, in the past the answer was a resounding YES! Even if you only earned £500 you’d still need to complete a Self Assessment tax return. Thankfully though that’s been addressed with the new small earnings Trading Allowance.

In this video we chat about this more from a YouTube perspective but it equally applies to just about any small earnings:

Do you pay tax on SMALL EARNINGS from self employment in the UK? (YouTube, Ebay, Etsy etc.) [6]

Watch this video on YouTube.

Let’s briefly chat about the ‘personal allowance’

Just to give a bit of background, in the UK we already have a tax free allowance. At the moment it’s set at £12,500 – so you can earn up to £12,500 per year completely tax free. We’ll ignore National Insurance (NI) for the minute. The tax free allowance, known as your personal allowance, normally goes up every year and providing your TOTAL income from all employments and self employments is below that threshold, you won’t pay any tax. You can find more information about this from the HMRC site here.

What about Self Assessment tax returns?

Well, here’s the thing. Just because you don’t have to pay any tax doesn’t mean you get away without having to complete a tax return! If you’re self employed you need to complete a tax return no matter how much you earn. Simples. End of. So even if you only earned £500 from a few Etsy sales you’d still have to keep full accounting records and do your annual Self Assessment. It was a total ball-ache for everyone involved and a precious waste of everyone’s time and energy. Thankfully HMRC have seen the light and in 2018 introduced a new small earnings TRADING ALLOWANCE! YAY!!

What is the Trading Allowance?

The trading allowance in the UK is a very simple new £1,000 allowance designed to reduce paperwork both for HMRC and self employed folk. You’re now entitled to a tax-free trading allowance on your first £1,000 of self employment income. That’s £1,000 turnover, not profit. You’re still self employed (see below) but you just don’t need to fill in a tax return… sort of. You might still be asked to complete a tax return but when you do so you’ll see a box asking “Was your turnover £1,000 or more in total from all self-employments?”. This is what the box looks like on a tax return:

UK Trading Allowance

If you select ‘No’ then the system automatically by-passes the entire ‘self employment’ section of your tax return. HMRC no longer care. You still need to submit a tax return if you’re asked to do so but there’ll be very limited information in it.

This is really fantastic news for anyone self employed making less than £1,000 per year. Think of:

  • Musicians doing the odd bit of private music lessons, gigs and the like
  • Maths teachers doing occasional private lessons from home
  • Your eBay business that never really worked out
  • Your pitiful YouTube income
  • Income from the end of a tax year

In the past you should have been declaring all of the above on a tax return. Now you don’t have to if it’s less than £1,000… but please read on as it’s not quite that simple. Effectively though, you now have 2 allowances:

  • Personal allowance: £12,500
  • Trading allowance: £1,000

So my personal allowance is now £13,500?

No. Your personal allowance is £12,500… plus £1,000. The £12,500 covers ALL income. The £1,000 ONLY covers income from self employment. So yes, if you’re employed AND self employed you can technically earn £13,500 tax free. If you’re ONLY self employed then you can earn £12,500 tax free. Oh, and there’s the new ‘income from property allowance’ too – also £1,000. So really your personal allowance is now £12,500… plus £1,000 from self employment… plus £1,000 from property income. Sort of.

Is my business just a hobby?

Just need to cover this one very briefly. If you think your business is a business then it’s probably a business. You can’t pretend your business is a hobby just to avoid paying any tax. Ultimately it’s down to how ‘nice’ HMRC are feeling and by that read “how much budget do they have to chase the smaller businesses”. At the moment they have very little budget to do anything, but that doesn’t mean you’re off the hook. It’s really not worth the risk. You’re probably a business if:

  • You have business cards
  • You have a business web site
  • You have a business domain name
  • You sell regularly with a view to making a profit
  • You make things to sell
  • You sell stuff through any means on a regular basis
  • You earn affiliate income through any means
  • You sell your services to people
  • You earn AdSense income (i.e. YouTube)

Selling random junk on eBay is only a business if you’re selling stuff for more than you paid for it. Remember, we pay tax on PROFITS not on TURNOVER. So even if your tiny eBay business is making a small profit, it’s probably making a substantial loss by the time you account for all your business expenses. Too bigger topic for this article. Back to my initial point though, if you think it’s a business it’s probably a business.

Do I still need to register for Self Employment?

This is a very vague one. I’d say yes. Register and put the ball back in HMRC’s court. If you continually submit tax returns selecting the ‘No’ box as shown above, they may eventually stop asking you to complete a tax return. I’m not sure – it’s too early days to say. Register for self employment to play safe.

Do I still need to keep accounting records?

Again, this is very vague. I’d say yes no matter what. You’re still in business and it’s just good practice to keep good records. Cover your bases in case HMRC turn around and say “You know how you said you only earned £999 last year? Prove it.”. Tax audits go much more smoothly when you’re forthcoming with information and having ‘holes’ in your accounts from years when you happened to make less than £1,000 will just make life awkward for everyone.

I’ve made a trading loss – should I just ignore it?

Ha ha! You’ve found the loop hole! Well, it’s not a loop hole. It’s a chasm of a hole that could catch out a lot of self employed folk if they invested heavily in their business in the first year while making less than £1,000 turnover. This is where you REALLY need to speak to an accountant. You need to safeguard your trading losses as these are an important part of running a business. You don’t have to pay tax on losses, obviously, and you can carry forward losses from year to year, generally. How do you do that if you haven’t completed a tax return? There is a little box on the tax return to allow for this, but it’s easily missed:

Trading Loss

I would say, if you’ve made a loss of any size you absolutely need to speak to an accountant and make sure it’s carried forward from year to year until needed. What happens if you don’t declare your loss? No idea – I suspect you’ve lost it… pardon the pun.

Wrapping this up

The new trading allowance is fantastic. It’s a welcome threshold that will make almost zero difference to the Treasury’s income while reducing paperwork for everyone. But, don’t lose out on your all important trading losses. If in doubt, speak to an accountant.

I’d love to be kept up to date with progress of your self employed journey! Keep in touch over on Twitter @smallbusinesstb – best of luck!

Photo credit: rawpixel

Andy Mac

Andy MacLellan has been self employed for over 20 years. In that time he's established a number of successful businesses and worked alongside some of the biggest corporate blue-chips on the planet. Now his life mostly revolves around YouTube and Podcasts.
Andy Mac