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?

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 2024/25 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

What happens if my earnings go above the threshold?

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.

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.

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:

• 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.
 

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

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