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Are you a student running your own business? If so, do you understand your tax position?
Recent research suggests that up to 4% of students are self-employed, usually by selling items based on craft hobbies or re-selling items regularly on internet auction sites. With the rising costs of being in further education, many students will just want to earn the extra cash they need without giving any consideration to what their tax responsibilities are.
Here we talk you through the various tax matters you will need to think about if you are working for yourself.
Do students pay tax?
Yes, there are no special rules on taxing earned income if you are a student. So, if you start working for yourself then you will be taxed like any other self-employed individual. However, depending on your level of trading income you may not have any tax to pay due to the personal allowance and the trading allowance (see below).
Do I have to let HMRC know that I am working for myself?
This depends on a couple of factors. If you are earning a bit of income, on an ad hoc basis, from selling things you no longer need at a car boot sale or on an online auction website then HMRC will probably view this as not being self-employed.
What you need to be aware of is when your activities become more regular, organised and with a view to making a profit. For example, if you start to sell things regularly on internet auction sites, perhaps purchasing stock with a view to selling it on to make a profit, then this is likely to be viewed as running a trading business and therefore be self-employed.
Another example is if you make craft items as a hobby and a friend offers to buy one as a one-off transaction, this wouldn’t be viewed as running a business. But if you decide to sell more items, commercially, for example via a website or at a craft fair then you would be viewed as being self-employed. Am I employed, self-employed, both, or neither? covers in more detail some of the factors you may need to consider.
However, even if you are self-employed you may still not need to register your business with HMRC or complete a Self Assessment tax return. This is because of the trading allowance (also known as the trading income allowance) which allows you to make total trading income (so your sales before deducting any business expenses) of up to £1,000 each tax year (a tax year runs from 6 April to 5 April) from running a small business or from earning casual income without having to pay tax. So, if you are working for yourself to supplement your studies the first thing to do is to check whether you will have sales above or under £1,000 in a tax year.
There is more information on our website about the trading allowance explaining when it may or may not be beneficial to use it. However, in basic terms if your total trading income is below £1,000 then you do not need to register with HMRC unless you need to complete a Self Assessment tax return for any other reason. You also do not need to declare the income to HMRC when calculating your tax.
If you have total trading income above £1,000 then you will need to register your business with HMRC and complete a Self Assessment tax return. Don’t worry, there is information in the self employment section to help you understand what you have to do and we have a detailed guide to self-employment which contains further information including a case study showing how to prepare accounts and what to include on your tax return.
How do I know if I have to pay tax?
If your total trading income from your business is less than £1,000 it should be covered by the trading allowance and so there will be no income tax or National Insurance contributions to pay on any profits made.
If your total trading income from your business is more than £1,000 then you can either deduct the £1,000 trading allowance from this income or deduct your actual business expenses to calculate your taxable profit.
For example, Sian, a full-time student, makes and sells jewellery and during the tax year she sells £1,300 of jewellery, which cost her £400 to make. Sian would need to register with HMRC and complete a Self Assessment tax return.
However, when considering her tax position Sian can elect to use the trading allowance on her tax return so her taxable income from her business would be £300 (£1,300 less £1,000) or instead she could deduct her expenses and have a taxable income of £900 (£1,300 less £400). Sian would be better off claiming the trading allowance instead of deducting her business expenses.
As long as Sian’s taxable income is less than the tax-free personal allowance (which is £12,500 in the 2019/20 tax year) then she will not need to pay tax, but she will need to submit her tax return on time to avoid late-filing penalties even when there is no tax to pay.
Our trading allowance factsheet contains more examples of how the allowance works and what to consider before electing to use it.
Where can I get extra help in understanding my tax position?