Hobby Income

ent_moot

Let's suppose I create something in my free time that I am able to sell for a lot of money. For arguments sake, lets say 200k.

Now, consider that I am a full-time employee who earns enough that means I would need to pay 40% tax on extra "income".

However, I don't necessarily need this "income" now, and would happily only access in 10 years time.

Is there any way to do this in such as way as to reduce tax? For example, could I set up a company and have it "own" the 200k. Then, let's suppose I quit my job and work for myself in 10 years time, could I then use that 200k to pay myself an income from the company?

What about my wife, who will stop working after we have a child. Could I somehow pay her an income with this money and avoid the 40% tax?

The point is that I don't particularly need the money now - my long term plan is to "retire" (i.e. work for myself) as early as possible (ideally early 40s), and I would be happy not to access any of the money until then.

Maybe this is all a bad idea and I should pay the 40% tax, put the money in index funds and watch it grow at 5-6% a year (in which case, it might have exceeded the tax-free amount by the time I need it)?

Thoughts?

booksurr

hobby is £200 not £200,000, both have to be declared

the company would have to own the intellectual property or undertake the activity generating the sales for it to be able to retain the income. Obviously it is indeed sheltered in there for as long as you do not draw it out. However if the company does not undertake any future trading over those 10 years HMRC would regard it suspiciously and could, potentially, force it to be wound up. It is a risk you could take, you may get away with it, you may be unlucky.

your wife can be paid a realistic salary for a realistic amount of work done for the company. End of.

you can be paid a realistic salary for a realistic amount of work done for the company. You can't just pay yourself a salary for activity dissociated with that of the company. End of.

either you or your wife could be a shareholder and pay tax on dividends under the same rules, albeit she would pay slightly less than you as she will not incur higher rate if you keep the dividends low enough

ent_moot

Okay thanks.

It sounds like paying the straight 40% tax for extra income is the safest/easiest option.

I just wanted to be sure there wasn't an "obvious" way of reducing tax given that I tend to live a very inexpensive lifestyle and intend to save the money for the long term.

I guess not!

[edit] Also, back-of-the-envelope calculations show that I'll be exactly back to 100% after 10 years if I invest and get 5% return per year. So, may as well pay the 40% tax and invest...

ent_moot

Oh, another question: given that it's the one-off sale of something rather than an "income" would it be capital gains tax instead of income tax?

booksurr

ent_moot wrote: »

Oh, another question: given that it's the one-off sale of something rather than an "income" would it be capital gains tax instead of income tax?

Sale of an investment/capital item is not hobby "income"

would you like to start again with the actual info this time?

Darksparkle

You'll lose your personal allowance and some will be taxed at 45%.

https://www.gov.uk/income-tax-rates/current-rates-and-allowances

TheCyclingProgrammer

I wouldn't dismiss the idea of setting up a Ltd company with you and your wife as joint shareholders (in whatever split makes sense for you, it need not be 50/50).

You don't mention what the income is for but if you put all your trading through the Ltd company then it will pay corporation tax on its profits. You can access any retained profit at any time by declaring a dividend, which if you and your wife are 50/50 shareholders would be split 50/50 between you and taxed accordingly. This isn't a bad way of setting aside income until you need it.

Some things to consider though:
* Dividend tax rules change from April but may still be favourable long term, especially if you can share the profits with your wife.
* Running a Ltd company is a bit more involved than being a sole trader - you have annual accounts and returns to file, a corporation tax return to file and whilst there is no *legal* requirement to register for self assessment just because you're a company director (despite what HMRC claim) you will likely need to register anyway at some point once you start distributing dividends (as will your wife if its above her personal allowance) in order to declare them and pay tax on them.
* You may need to pay an accountant to help with the above.

As for other options, do you and/or your employer contribute towards a pension? This could be a way of reducing your gross pay below the higher rate threshold.