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I have a plan for some software / services that I believe can generate some cash through advertisements, selling 'pro' versions of the application in their respective 'app stores' and through donations.

I have a full-time job, and I am wondering where I stand when it comes to tax. Does the income from this count as pay? Do I need to register myself as a trader, or create a company?

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You can operate as a sole trader i think while in full time employement elsewhere, you dont need to register a company, you can operate as a sole trader and do your own self assessment and tax return each year, get into the habit of doing things the right way, there are perks from being open too, for example being able to class some purchases as for your business. – user14718 Jan 11 '12 at 19:16

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Yes this counts as income. In the UK you will need to register for self-assessment http://www.hmrc.gov.uk/sa/register.htm and declare this additional income.

Personally I wouldn't set up a LTD company until you are sure that this is going to be a significant enough income stream to warrant the effort. However when you do this it is not a difficult process and will almost certainly be a more tax efficient approach. Also keep track of the costs you incur creating this product, as you will be able to reclaim some of them.

If you already have a full-time job, you should probably also check your contract to see if there are any issues with you doing this on the side.

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+1 what he said. – edralph Jan 11 '12 at 16:53
Thank you for the helpful answer! – krslynx Jan 11 '12 at 17:54
I'm not completely certain whether you should also register as self-employed in this circumstance as part of the self-registration process maybe someone can clarify or you can check with HMRC who are generally helpful. – yojimbo Jan 18 '12 at 15:23
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Does the income from this count as pay?

No, the government is totally happy for yo to not pay income tax. Actually when you grow and become a hugh advertising income business like google, you never pay any tax.

Heck, do you really think the government is stupid?

You have to pay income tax on YOUR INCOME. Not "on your income except", ON YOUR INCOME. Donation are nothing more than income, otherwise I would happily "donate" my work to my clients in return to them donating their moeny to me.

I agree with your obvious assessment that the governments are mostly run by idiots, but sadly I have to inform you this idiocy does NOT extend towards ignoring income that can be taxed ;)

Do I need to register myself as a trader, or create a company?

Different question and depends a lot more on what you like to grow to and other elements of your strategic setup. In the UK a LTD is cheap to set up, though, so I would just do it.

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Nice for the -1. Where do you live? North Korea where the art of.... making answers in a funny way is getting you 6 months labor camp? – NetTecture Jan 11 '12 at 17:13
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Unfortunately for me a down-vote requires 125 reputation; having just joined I have 7. You likely got the down-vote for answering the question in an un-funny way that just made you seem like a dick. – krslynx Jan 11 '12 at 17:57
Boom! Seems like not everyone likes your particular 'style' NetTecture. Who knew? ;) – Ryan Jan 12 '12 at 8:51
More: who cares. I don't. – NetTecture Jan 12 '12 at 8:58
@NetTecture: I am sorry, but you are wrong with the "no exceptions" thing. There are exceptions, for example in some countries income from berry picking is tax free: eg. in Finland, also in Poland. – miernik May 6 '12 at 7:56
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