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?
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.
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.