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The trading allowance is a type of tax-free allowance which you can use against trading or casual income. If you’re an individual setting up a full-time sole trader business or considering a side-hustle hobby business in your spare time, the trading allowance can have an impact on your reporting requirements, and how much tax you need to pay.
 

What is the trading allowance?

How much is the trading allowance?

What happens if my earnings go above the threshold?

Can I still claim the trading allowance on my tax return?

The trading allowance was first introduced in 2017 as a way to support individuals earning a relatively low amount from casual trading or miscellaneous income.

You can use the trading allowance even if you receive an income from other sources, such as an employer. For example, you could earn a salary from a full-time job, and still use the trading allowance against your self-employed income (but not against your wages, sorry!).

The trading allowance is £1,000 for the 2023/24 tax year. It means that you can earn up to a total of £1,000 from self-employment or miscellaneous activity in a tax year, and won’t need to tell HMRC about it or pay tax on the income. Remember that it’s a total for the year, though! You won’t get a separate allowance for each type of income.

The trading allowance applies to your gross income, before deducting tax and expenses. For example; you have business income of £1,500 in a tax year. You’ll need to register with HMRC and submit a Self Assessment tax return, even if you have £700 of expenses bringing your profit to £800.

The difference between profit and income

Whilst the terms profit and income are sometimes used interchangeably, they mean very different things.

 

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You’ll need to register for Self Assessment as a sole trader if your self-employed or casual income goes over the £1,000 trading allowance threshold in a tax year.

Once registered, you’ll need to submit Self Assessment tax returns to tell HMRC about the money that you earn, so they can work out if you have any tax to pay.

You can still claim the trading allowance even if you go over the threshold and need to register for tax. This can be useful because your tax bill is worked out using the amount which is left over after deducting either the £1,000 trading allowance or any allowable expenses.

It’s up to you whether you claim tax relief on your allowable expenses or the trading allowance, so choose the one which gives you the biggest tax deduction for that year! For instance:

In the following examples, a basic rate taxpayer earns £2,000 from their side-hustle during the tax year. Because their total miscellaneous income is more than £1,000 they’ll need to register for Self Assessment.

In example one they decide to claim the trading allowance so this is deducted from their income. In example two they claim £750 of allowable expenses, and in example three they claim £1,200 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 to pay
(Total remaining multiplied by 20% basic rate of income tax)
£200 £250 £160

 
The examples show the difference that claiming either the trading allowance or your allowable expenses can make to your final tax bill!

Running a business and need an accountant? Call us on 020 3355 4047 or get an instant online quote.

About The Author

Beth-Anne Bruce

I'm an experienced and fully AAT and ACCA qualified accountant, who is enthusiastic about helping business owners succeed. I also love cooking and needlepoint (at different times!). Learn more about Beth.

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Charles
Charles
27th April 2021 12:09 pm

When did the hobby allowance come in

Elizabeth Hughes
Admin
Elizabeth Hughes
28th April 2021 11:36 am
Reply to  Charles

Hi Charles,

The trading allowance was introduced at the start of the 2017/18 tax year, on 6th April 2017. I hope this helps!

Best wishes

Elizabeth

Emma
Emma
29th September 2021 5:26 pm

My daughter is employed by a school but the after school clubs she runs are paid to her separately by a charity. She knows she need to set up as a sole trader but would she be able to deduct the £1000 trader allowance as she is employed aswell.

Elizabeth Hughes
Admin
Elizabeth Hughes
1st October 2021 4:24 pm
Reply to  Emma

Hello Emma Thanks for your message! Yes, your daughter can still use the trading allowance for self-employed income, even if she also employed. As a side note, it’s only possible to claim the trading allowance as long as she doesn’t also claim her expenses (one or the other, not both), so it might be worth your daughter calculating the total of her allowable expenses. If the total is more than the £1,000 trading allowance then it will be more beneficial to claim tax relief on those, rather than the allowance. I hope this is useful, but do let me know… Read more »

Emma Groves
Emma Groves
1st October 2021 8:04 pm

Hi Elizabeth, Thank you so much for the advise, we really appreciate it.
Emma

Steve
Steve
6th January 2022 2:54 pm

Hi. My wife has done some work for me to help me out, can she use the trading allowance? She has a full time employed job.

Elizabeth Hughes
Admin
Elizabeth Hughes
11th January 2022 10:25 am
Reply to  Steve

Hi Steve

Thanks for your message. Without knowing the full situation, it’s tricky to say for sure. Generally, the trading allowance is a £1,000 allowance available against self-employed income, and can be used even if the tax payer has other income (such as working for an employer as well as having self-employed income). I hope that makes sense, but do chat to one of the team if you’d like more help. Click the live chat button on screen, or call 020 3355 4047 if you need us! Have a lovely day.

Best wishes

Elizabeth

Julie Chipperfield
Julie Chipperfield
22nd April 2022 8:18 am

Im a hobby baker looking at The Trading Allowance to see if it would be worth doing as I don’t take money at the moment for the cakes made.
It states under a £1000 Income
Would I be taking into account the ingredients bought
ie
£10 ingredients sold for £20
So made £10
Or
Or would I not be able to include the cost of ingredients

Elizabeth Hughes
Admin
Elizabeth Hughes
25th April 2022 9:49 am

Hi Julie

The trading allowance is based on the amount that you earn before deducting anything (that is, all of your self-employed income, before you take off any costs like ingredients). So, if you sell for £20, that’s the amount of income, even though the profit is £10.

I hope that helps, but if you want to chat to the team about anything, just call 020 3355 4047 or use the live chat button and we’ll do all we can to help!

Best wishes

Elizabeth

Neil Roger
Neil Roger
21st June 2022 9:34 am

Hi I am a retired architect (was self employed) and have been offered a small amount of money (£150) to help a friend on an architectural project –would this qualify for the trading allowance? I pay tax on my pension

Elizabeth Hughes
Admin
Elizabeth Hughes
24th June 2022 12:58 pm
Reply to  Neil Roger

Hi Neil

Thanks for your message! Yes, if your income from self-employment is less than the £1,000 trading allowance, you won’t need to register for Self Assessment or pay tax on it. If your self-employment income goes above the £1,000 threshold, you will need to register for Self Assessment, and report your income to HMRC.

I hope this answers your question, but just let us know if need any help with anything.

Best wishes

Elizabeth

Ed Braw
Ed Braw
19th September 2022 11:57 pm

Soul Band of 8 musicians offered to play at a venue for £1200. Money will be split 8 ways. That will be £150 each. all musicians are employed in other line of work and paying taxes. will this be subject to Sole Traders Allowance allowing each member the potential to earn £850 without being taxed? the venue have asked if we are VAT registered, how should I respond?

Elizabeth Hughes
Admin
Elizabeth Hughes
23rd September 2022 10:06 am
Reply to  Ed Braw

Hi Ed Thanks so much for your message! The trading allowance is an individual allowance, so each individual member of the band is entitled to earn up to £1,000 (each) of self-employed income in a tax year before they need to tell HMRC or start thinking about tax or tax returns. So, even if someone has a full time job and earns lots of money from their employer, they can still use the trading allowance against self-employed income up to the £1,000 threshold. The tricky bit here is showing that the band’s earnings are split between each member, so ideally… Read more »

Aslam Sarfraz
Aslam Sarfraz
5th June 2023 3:47 pm

Hi
I have done private hire as a side job in the last financial year as I work full time and this was over the the trading allowance however, I plan to do this again this tax year but plan to keep it under the £1,000 trading allowance, the question is can I used this allowance every tax year?

Elizabeth Hughes
Admin
Elizabeth Hughes
7th June 2023 4:49 pm
Reply to  Aslam Sarfraz

Hi

Thanks for your message. The £1,000 trading allowance is an annual allowance, so this can be used against total self-employment income each tax year. Let us know if there’s anything at all we can help you with!

Best wishes

Elizabeth

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