The trading allowance lets you take up to £1,000 of gross trading income each tax year out of the tax net. It has existed since 6 April 2017, and it is the reason someone selling crafts at weekends or doing a little freelance work does not necessarily need a Self Assessment return. This guide is about how the allowance itself works. For the harder question of whether a side activity counts as trading in the first place, see our side hustle tax guide.
What it covers
gov.uk's guidance on tax-free allowances on property and trading income says the trading allowance applies to income from self-employment, casual services (its example is babysitting) and hiring out personal equipment such as power tools. The allowance is personal to you, so it is set against your own trading income.
The limit is measured on gross income, meaning everything you received before any expenses or other allowances. Costs do not reduce the figure you compare against £1,000. If you sell £1,400 of goods and spent £900 on materials, your trading income is still £1,400 for the purposes of the allowance.
Full relief
If your gross trading income for the year is £1,000 or less, you get full relief. You may not need to tell HMRC or declare the income, and no tax is due on it, although gov.uk notes there are circumstances where you must still register. You still need to keep records of what came in, because HMRC can penalise inaccurate, incomplete or unreadable records.
If you already file a return for another reason, such as a rental property or a job with untaxed benefits, you can instead deduct the allowance in the relevant section of your return.
Partial relief
If your gross trading income is over £1,000, you can choose partial relief: deduct £1,000 from your income instead of deducting your actual expenses. The deduction cannot be more than your income, so it cannot create a loss.
| Gross income | Actual expenses | Taxable profit with allowance | Taxable profit with expenses | Better option |
|---|---|---|---|---|
| £1,400 | £300 | £400 | £1,100 | Trading allowance |
| £1,400 | £1,100 | £400 | £300 | Actual expenses |
| £1,400 | £1,600 | £400 | A loss of £200 | Actual expenses, if you are registered and want to claim the loss |
In the first row, the allowance beats £300 of real costs. In the second, £1,100 of costs beats the flat £1,000. In the third, only claiming costs can produce a loss, which you can only use if you are registered for Self Assessment. The break-even point is simple: use the allowance when your real expenses are under £1,000. Run the numbers each year, because a year of equipment purchases flips the answer.
You cannot split the choice on the same income: claim the allowance or the expenses, not both. gov.uk adds that if you use the allowance you cannot claim other expenses or allowances on that income. That includes the flat rates for working from home.
When you have to register
gov.uk's guidance says that if gross trading income is over £1,000 you must register for Self Assessment by 5 October after the end of the tax year. Our registration guide walks through the steps and the late-registration risk. You may also choose to register below that line to prove you are self-employed (for example for Tax-Free Childcare), pay voluntary Class 2 National Insurance or register as a CIS subcontractor. Note that the allowance itself cannot be used to create a loss.
If you already register but your income drops to £1,000 or less and you no longer need a return, gov.uk says to tell HMRC as soon as possible; see how to stop filing Self Assessment.
Who cannot use it
You cannot use the trading allowance in a tax year in which you have income from:
- a company that you, or a person connected to you, own or control;
- a partnership in which you or a connected person is a partner;
- your employer, or your spouse's or civil partner's employer.
It also does not apply to partnership trading income. A partner's share of profit is reported on the SA104 with ordinary expenses rules.
Effect on other measures
Profit worked out with the allowance reduces your income for tax credits, the High Income Child Benefit Charge, student loan repayments and Married Couple's Allowance. gov.uk says Universal Credit income is not affected. It is worth knowing if you are near a threshold.
How ac-co helps
ac-co calculates both options on your SA103 data (the £1,000 trading allowance and your real allowable expenses) and shows which one gives the lower taxable profit, so you can review the choice before the return is filed.