Hobby or Business? How HMRC Decides — and the £1,000 Trading Allowance in 2026/27
How HMRC tells a taxable side income from a tax-free hobby, and how the £1,000 trading allowance in 2026/27 lets many casual sellers avoid registering for Self Assessment altogether.
Why the hobby-vs-business question matters
Selling handmade crafts, doing occasional freelance work, or clearing out a wardrobe on a resale app all raise the same underlying question: is this a taxable trade, or a tax-free hobby? Getting it wrong in either direction has consequences — under-declaring taxable trading income risks penalties, while over-reporting genuinely incidental hobby income wastes time on paperwork that isn't needed.
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Open Self-Employed Tax calculatorThe "badges of trade" test
HMRC does not apply a single rigid rule. Instead, it weighs a set of factors known as the badges of trade, developed through decades of case law:
- Profit-seeking motive — are you trying to make money, or is any income incidental?
- Frequency and number of transactions — occasional one-offs look more like a hobby; regular, repeated sales look more like trading
- Nature of the item — was it bought specifically to resell, or is it a personal possession you no longer want?
- Modification or organisation — did you do work to increase the value (making, altering, repairing) before selling?
- Method of finance — did you take out finance or invest capital specifically for the activity?
- Marketing — do you actively advertise, run a shop page, or promote what you sell?
No single factor decides the case alone; HMRC looks at the overall pattern. Someone clearing out unwanted clothes on a resale app a few times a year looks very different, under these badges, from someone regularly buying stock to resell for profit.
The £1,000 trading allowance: the practical safety net
Regardless of exactly where the hobby/business line falls, HMRC provides a simpler practical rule for smaller amounts: the trading allowance. If your gross income from self-employment or trading-type activity is £1,000 or less in a tax year, that income is tax-free and, in most cases, you don't need to register for Self Assessment or report it at all — even if, strictly speaking, the activity might otherwise count as trading.
Worked example: staying under the allowance
Someone sells handmade candles occasionally, bringing in £850 across the tax year in total sales.
- Gross trading income: £850
- Trading allowance: £1,000
- Because £850 is below £1,000, the income is entirely tax-free, and no Self Assessment registration is generally needed for this activity alone.
Worked example: exceeding the allowance
The same candle-maker's sales grow to £3,200 in the following tax year, with £900 of allowable costs (wax, wicks, packaging, postage).
They must register for Self Assessment and choose between two methods:
- Trading allowance method: £3,200 − £1,000 (flat allowance, no actual expenses claimed) = £2,200 taxable
- Actual expenses method: £3,200 − £900 (real costs) = £2,300 taxable
Here, the trading allowance method gives a slightly lower taxable amount (£2,200 vs £2,300), so it's the better choice — though the gap narrows or reverses for sellers with genuinely high costs relative to sales, in which case claiming actual expenses would be better.
self-employed-tax-ukBottom line
Whether an activity counts as a taxable trade depends on HMRC's badges of trade — profit motive, regularity, and organisation — rather than any single test. But for most people with modest side income, the practical answer is simpler: stay under the £1,000 trading allowance and there is usually nothing to report; go above it, and you'll need to register for Self Assessment and choose whichever deduction method — the flat £1,000 allowance or actual expenses — gives the better result.
Sources
Frequently asked questions
What is the trading allowance?
The trading allowance is £1,000 a year of tax-free income from self-employment or casual trading activity, such as selling handmade items, freelance work or occasional services. If your gross income from these activities is £1,000 or less, you generally don't need to tell HMRC or file a Self Assessment return for it.
How does HMRC decide if something is a hobby or a business?
HMRC looks at 'badges of trade' — factors such as whether you intend to make a profit, how frequently and regularly you sell, whether you actively market what you sell, whether you buy items specifically to resell, and whether the activity is organised in a business-like way. No single factor is decisive; HMRC weighs them together.
Do I pay tax on a genuine hobby that occasionally makes money?
Generally no, if it is genuinely a hobby without a profit motive and any income is incidental and modest — for example occasionally selling a handmade item to a friend. However, regular, organised selling with a profit motive is treated as trading regardless of how you personally describe it.
What happens if my side income is above £1,000?
If your gross trading income exceeds £1,000, you need to register for Self Assessment and declare it. You can then choose to deduct the £1,000 trading allowance from your income instead of your actual expenses, or deduct your actual allowable expenses — whichever gives the better result.
Do online marketplace sales count towards the trading allowance?
Yes. Income from selling via platforms like eBay, Vinted, Etsy or Depop counts as trading income if the activity amounts to trading (regular, organised, profit-motivated selling), and is measured against the same £1,000 trading allowance as any other self-employment income.
Has the £1,000 trading allowance changed for 2026/27?
No — the trading allowance has remained frozen at £1,000 since it was introduced in April 2017 and continues at that level for 2026/27.
Try the calculators
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