How to start a cake business
With the rise of Instagram as a platform to show off work, and the boom in hobbies and side hustles that came out of the furlough and lockdown period - the business of selling cakes has never been more popular.
By the end of 2020, analytics consultancy Kantar Group calculated that there was a 34% increase in the purchase of baking ingredients, as more and more people spent time in the kitchen. For some this went further than a hobby as they honed in on a craft and business.
But how do you go from hobbyist to business in the world of baking cakes? Here we look at how you start a cake business, make money from it and how you’re taxed.
How do I start a cake business?
We’re no puff pastry experts so won’t be offering baking tips, but we can help with the business side of things. There’s a few admin related hurdles you need to consider before you start selling people cakes:
- Register as self-employed with HMRC. Even if it’s a side hustle and you’re already employed, you’re going to have to declare that income with HMRC in the form of a self assessment - You can register as self-employed in the Earnr app here and we’ll handle the rest.
- Register your premises with the local environmental health service - This means they’ll come and do a check of your food preparation area. Make sure everything is as clean and organised as it can be.
- Get a food hygiene certificate - You want to make sure your kitchen is up to the food standards agency level. If you’re new to the industry you can take a level 2 course which is a good introduction.
- Inform your landlord or mortgage provider - that you’re running a business from the premises. Your landlord cannot unreasonably withhold or delay their permission, but it’s good to be clear and communicative from the beginning.
- Consider taking out insurance - Nobody wants to think about this scenario but it could be worth taking out liability insurance just in case someone tries to sue you for an incident.
- Keep track of your finances - as you go, track all the items and costs you need to pay for setting up your business. In the Earnr app, you can claim most cake related expenditure as expenses, meaning you get this deducted from your tax bill.
Once you’ve checked these off you can start considering the business side of things:
- What’s your unique selling point? - It’s a competitive market out there so think about how you differentiate yourself. Is it in your product? Are your cakes vegan friendly or locally sourced? Or is it in the service you offer, a cake subscription, or delivery to your door. Maybe the way you market yourself, are you the brand or is it more about the product? What’s your brand tone of voice, warm and friendly or cheeky and fun?
- Choose your channels - Once you’ve established your brand then it’s about how you reach your audience, and what channel fits your image. The cake industry is mostly on Instagram, which makes sense given how visual cake is. Instagram also has a shoppable option meaning you can sell directly through the platform. It’s also worth getting a presentable website that people can place orders through. And once you have people’s details a newsletter with updates can keep people aware of what you’re up to.
- Be proactive in networking - Use every fete and fair in your area, get a pitch set up and make yourself known to the local community. Chances are you’ll be keeping your business local initially as it’s quite hard to transport cakes.
How do you make money selling cakes?
There are plenty of different methods for making an income by selling cakes. We’ve already mentioned physical ways, but these can include:
- Stalls at fairs and fetes
- Local farmers markets
- To friends and family (working your existing network is a great way to get your name out)
The digital world arguably offers more far reaching channels. You could:
- Set up a Deliveroo dark kitchen - this gives you a means of delivering your goods.
- Set up a Shopify page - this gives you a customisable page which can link to third party pages as well as a space for blog posts and content that can help you sell.
- Use Instagram as a place to build your reputation and business as it allows you to showcase your work and sell directly through the platform.
- Build your own site using Wix, Wordpress or Squarespace where you can demonstrate your work, and allow people to make online purchases.
It’s also worth thinking about pricing. Make sure to do some market research on how much similar businesses are charging customers. If you’re new to the market then it might make sense to try and undercut competitors, but be conscious that there’s a decent amount of overheads when you set up, such as ingredients and kitchen utensils.
If you come to scaling your business up then you’ll also need to think about how you keep it profitable, if you need to rent a space and employ people then you’ll need to know the demand is there.
How much would I pay in tax?
As with any self-made income you’ll need to pay tax on your income if you make over £12,570 in the tax year.
If you’re doing baking on the side then you’ll need to understand paying tax as a side hustle. You can read more about side hustles in our blog post here.
If you’re going full-time creator mode then you’ll need to understand paying tax as self-employed. You can read more about going fully freelance in our blog post here.
As you start out you’re more likely to be a sole trader in which case the bands for tax are:
- Tax allowance: 0% of earnings (You’ve earned between £0 and £12,570)
- Basic rate: 20% of earnings (You’ve earned between £12,571 and £50,270)
- Higher rate: 40% of earnings (You’ve earned between £50,271 and £150,000)
- Additional rate: 45% of earnings over £150,000
Read about what tax bands are and how do they work here.
If you start hitting that higher rate of tax than it’s worth setting up as a limited company. This means you’ll pay corporation tax on your earnings at 19% rather than 40%+ income tax. If you’re on the basic rate it’s worth remaining as a sole trader and avoiding the additional admin and costs of setting up a limited business.
Each year you need to fill out a self-assessment tax return. What you pay is your freelance tax bill minus the expenses of running your business. You can read more on how to complete your self-assessment tax return in this Earnr article.
The usual cut off date to complete your self-assessment is the 31st of January if you’re doing it online, and 31st of October if you’re completing the form by post.
How can Earnr help?
Earnr allows you to track your incomings and outgoings over the course of the year, and automate your tax return. You mark each payment you receive and each expense to your income so that by the time you get to doing your tax return, we’ll have everything we need to do the process for you.
We also give you real time projections for your income as the year progresses so you know how much tax you’ll need to pay. You can say goodbye to manual bookkeeping!
