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.
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!).
How much is the trading allowance?
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.
Income is also known as gross revenue – it’s the money you receive as a business during a given period
Profit is the amount you have left over after deducting expenses. This is the amount you really make.
Sole Trader accountancy services
From only £24.50 per month
What happens if my earnings go above the threshold?
Can I still claim the trading allowance on my tax return?
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.
If your expenses total £1,200, this is more than the £1,000 allowance so claiming these gives you a bigger reduction on your tax bill
If your expenses for the year are £750, this is less than the £1,000 allowance so claiming the trading allowance on your return will be more useful
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.
Total self-employed income for the year
Amount to deduct
£2,000 – £1,000 =
£2,000 – £750 =
£2,000 – £1,200 =
Income tax to pay
(Total remaining multiplied by 20% basic rate of income tax)
The examples show the difference that claiming either the trading allowance or your allowable expenses can make to your final tax bill!
Subscribe to our newsletter to get accounting tips like this right to your inbox
About The Author
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.