So let's say you started out with a hobby - something in the arts-and-crafts field, for instance. You post pictures of a few of your creations on social media, and get a surprising number of positive comments. A couple of people ask if you'd consider making something for them (paying your costs, of course), and are delighted when you do.

They're so delighted, in fact, that they post pictures of your stuff on their own pages. Soon enough, people you don't even know are asking you to make things. By now, they're actually offering you some pretty decent cash for your work. Before you know it, you've got an Etsy shop and with regular orders. You're buying materials to pursue your hobby, and you're getting more than your costs back.

The thing is, the taxman has a word for this kind of hobby. He calls it “running a business” - and he wants his cut of your profits.

In general, HMRC don't care if you sell a few possessions online or make a few quid out of your hobby on Etsy. In fact, you can make up to £1,000 a year this way and he'll usually give you no grief over it. However, if you sell things regularly, or make enough doing it, he'll want you to do some paperwork. This is where the Self Assessment tax return system comes in.

Self Assessment Tax Returns for Etsy

Registering for Self Assessment means getting a Unique Tax Reference (UTR) number and an activation code from HMRC. Once you're all set up, you'll have to start counting the pennies coming in and going out of your business.

When you file your yearly tax return, those numbers will determine how much tax you owe. It really does pay to be thorough with this stuff right from the start. The taxman will want to know about every payment you've got coming in, naturally. However, any essential costs you've got can count against the profits you pay tax on, bringing what you owe down.

This is a huge topic, and it's all too easy to trip yourself up if you don't know the more intricate details of the system. A lot of people end up paying too much tax on their income. Worse still are the ones who underestimate what they owe. Getting caught in the spotlight of an HMRC enquiry is absolutely no fun for anyone.

See how we can help you with self assessment tax returns.

Is my Etsy hobby a “business”?

This isn't as simple a question as it might seem. Here are a few things to consider:

  • Is your main goal to make money?
  • Are you selling regularly or often?
  • Are you buying stock or materials just to continue selling your products?

If you're answering yes to any of these, then HMRC might decide that what you do counts as a business. It's not always so cut-and-dried, though, so it's worth talking to RIFT to find out exactly where you stand.

How much can I make on Esty before I pay tax?

Basically everyone gets a tax-free Personal Allowance. Right now, for instance, most people won't pay tax until they make over £11,850 a year. However, just because you aren't making enough to pay tax, that doesn't mean HMRC isn't interested in your affairs. If you're running a business, you've still got to keep precise records and file your tax returns -  even if you're actually losing money!

If you've already got a day job and you sell on Etsy as an "extra", your personal allowance will be taken into account by the company you work for when they tax your pay. If you've got a job you still need to declare this additional income to HMRC unless it's under £1000.

There's a particular wrinkle in the rules for people who sell stuff casually online. If your income from things like online sales comes to under £1,000, you can use the new “trading allowance” system. Basically, this just means that you don't need to declare the income. However, there are a couple of twists and turns to be aware of here:

  • If you're already on Self Assessment, you have to “make an election” to use your trading allowance. It doesn't just apply automatically, and you still have to declare the income.
  • You can't use the allowance to claim you've made a loss. The most you can do is reduce your taxable income by £1,000, to a minimum of £0.
  • If you claim the trading allowance, you can't also claim your normal expenses against your profits. It's one or the other. Similarly, if you've got 2 or more sources of income, you can't use normal expenses for one and a trading allowance for the other.

In many cases it might not be immediately obvious which system leaves you better off. Again, though, RIFT can always guide you through the regulations and pitfalls to keep you on track.

Running a business of any size can be exciting and profitable. There are a lot of dangers and obstacles to get past, though. RIFT's stand-alone tax return service is ideal for people who sell online, but there's so much more we can do to help – from claiming tax refunds to rescuing you from HMRC enquiries. Whatever your tax problems, worries or questions, talk to RIFT for instant advice and year-round protection for you and your money.

RIFT have been the UK's leading tax rebate and tax return experts since 1999.