My boyfriend and I are planning on starting a part-time business making and selling canvas prints of art work, personal photos and other images. On top of us both working full-time. We will not be making a massive amount of money, it will just be turning a hobby into profit, so will we have to pay tax or any other charges on whatever we earn. I have been told you can earn upto £4999 without having to pay tax. Do I need to declare the money being earned even if it's less than this amount?
The Income Tax individual personal allowance (the amount you can earn before paying Income Tax), which is £5035 for the tax year 2006/7, would normally be given to you as part of your code number used to calculate the Income Tax on you and your partner’s full time earnings. This means that any profits made above this, by the part -time business will be subject to Income Tax and National Insurance contributions on the taxable profits of the business.
So yes, you and your partner will have to pay Income Tax and National Insurance on the profits. You will, of course, be allowed to offset any expenses of the business, including a share of motor expenses and the cost of using a room in your house as a workshop or an office.
You must keep records of business mileage and be prepared to justify the claim if the Inland Revenue enquire. If you use your home as an office or run a business from it you can claim a proportion of the costs based on the percentage of the floor area used in the business. But you should check with your local council that you are not liable to pay business rates. You might also have to arrange separate insurance on your business assets.
You have 3 months to notify HM Revenue and Customs (HMRC) of your new business. You can download a CWF1 form by clicking here , or call the Self-employed Registration Helpline on 08459 15 45 15.
After the end of the first year or the first 5th April, whichever comes first, you and your partner will need to complete a Partnership Tax Return showing the Income, Expenses and Profits. The Partnership Tax Return is only for calculating the taxable profits.
You must include the share of the partnership taxable profit in your personal Tax Return (and your partner must also include his share of the partnership profits). It will be added to any other income you received in the tax year to calculate your total taxable income. Tax on your share of the partnership profits is payable in two instalments on 31 January and 31 July together with an adjustment of any balance owing the following 31 January. If your Income exceeds £38,335 (2006/7 rates) you will be liable to tax at 40%.
The basic National Insurance Contributions (NIC) is called Class 2 and for 2006/7 it is £2.10 per week usually paid by direct debit in 4 or 5 weekly instalments. But if your self-employed earnings are less than £4,465, no Class 2 is payable. The additional NIC is called Class 4. On profits between £5,035 and £33,540 the Class 4 rate is 8% and on profits above £33,540 it is 1%.
The ICAEW cannot accept any responsibility for the answers to the smallbusiness.co.uk website. By their nature the questions do not give sufficiently precise and full information to give a personal response. The response is general guidance including where the enquirer might find further and fuller information of relevance to the current enquiry.
See also: Small businesses hit by postal charges