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If you are a new sole trader aiming to run a full-time business, or just have a hobby business on the side, you may be wondering about tax. The good news is that there is a type of tax relief available. Known as the trading allowance, it has an impact on the amount of tax that you have to pay,

What is the trading allowance?

The trading allowance was first put into place in 2017 to give extra tax relief to sole traders and those with hobby side businesses. If you’re a sole trader whose business income is less than £1,000 a year, you don’t have to register for Self Assessment or pay tax on this income.

You will have to register with HMRC if your self-employed incomes goes over the £1,000 threshold in a tax year.

Can I claim the trading allowance on my tax return?

The trading allowance can also be offset against your business profits. This means that you can deduct £1,000 from your profit figure, which reduces your tax bill.

If you do claim for the trading allowance, you won’t also be able to claim for expenses on your tax return. You can use either, but not both at the same time, so work out which helps you most.

For instance, if your expenses total £1,200 worth of expenses, claiming these gives you a bigger reduction. If your expenses for the year are £750, claiming the trading allowance on your return will be more useful.

The difference between profit and income

Whilst some use the terms profit and income interchangeably, they mean very different things.

accounting services for sole traders

Is the trading allowance based on profit or 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 which bring your profit to £800.

Is the trading allowance more tax efficient than claiming expenses?

Registering for Self Assessment

If it looks like you’ll be earning more than £1,000 a year, you’ll need to register as self employed with HMRC. When you register, you’ll need to file a Self Assessment tax return each year.

Our online accountancy services include professional support for sole traders. Get an instant quote, or talk to an advisor by calling 020 3355 4047.

About The Author

Christopher Jones

Forensics graduate-turned copywriter and blogger. I love turning complex topics into easy to understand, yet engaging pieces of content.

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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

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