The trading allowance is a tax-free allowance that applies to trading or occasional income. Whether you're starting a full-time sole trader business or dabbling in a side-hustle hobby in your free time, this allowance can affect your reporting obligations and the amount of tax you owe.
What is the trading allowance?
The trading allowance was introduced in 2017 to help people who earn a small amount from occasional trading or other miscellaneous income.
Even if you have income from other sources like a job, you can still use the trading allowance. For instance, if you have a full-time job, you can apply the trading allowance to your self-employed income (but not to your wages).
How much is the trading allowance?
For the 2023/24 tax year, the trading allowance is £1,000. This means you can earn up to £1,000 from self-employment or other miscellaneous activities in a tax year without informing HMRC or paying tax on the income. However, remember it's a total for the entire year, not for each type of income separately.
The trading allowance is applied to your gross income, meaning it's calculated before deducting tax and expenses. For example, if you earn £1,500 from your business in a tax year but have £700 in expenses, bringing your profit down to £800, you still need to register with HMRC and submit a Self Assessment tax return.
The difference between profit and income
While "profit" and "income" are sometimes used interchangeably, they have distinct meanings.
Income, also called gross revenue, refers to the money your business receives within a specific timeframe.
Profit, on the other hand, is what remains after subtracting expenses. It represents the actual amount you earn.
What happens if my earnings go above the threshold?
If your self-employed or occasional income surpasses the £1,000 trading allowance threshold in a tax year, you must register for Self Assessment as a sole trader.
After registering, you'll need to submit Self Assessment tax returns to inform HMRC about your earnings so they see what tax you owe.
Can I still claim the trading allowance on my tax return?
You can still use the trading allowance even if you go over the threshold and have to register for tax. This can be helpful because your tax is calculated based on what's left after subtracting either the £1,000 trading allowance or any allowable expenses.
You get to pick whether you want tax relief on your allowable expenses or the trading allowance. Choose the one that gives you the biggest tax relief for the year! For example:
If your expenses are £1,200, more than the £1,000 allowance, claiming them will reduce your tax bill more.
If your expenses are only £750, less than the £1,000 allowance, claiming the trading allowance will be more helpful.
Let's look at some examples: A person earns £2,000 from their side hustle in a year. Since their total miscellaneous income is more than £1,000, they'll have to register for Self Assessment.
In one example, they choose to use the trading allowance, deducting it from their income. In another, they claim £750 of allowable expenses, and in another, they claim £1,200 of allowable expenses.
Example One | Example Two | Example Three | |
Total self-employed income for the year | £2,000 | £2,000 | £2,000 |
Amount to deduct | £1,000 - trading allowance | £750 - allowable expenses | £1,200 - allowable expenses |
Total remaining | £2,000 - £1,000 = £1,000 | £2,000 - £750 = £1,250 | £2,000 - £1,200 = £800 |
Income Tax (Total remaining multiplied by 20% basic rate) | £200 | £250 | £160 |
If you would like to speak to an accountant regarding any tax enquiries, contact info@kmaccountancy.co.uk or 0141 266 0563.
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