What is the trading allowance?
This section of the website looks at a new allowance known as the trading allowance which is available from the 2017/18 tax year onwards to those with trading or miscellaneous income. The allowance is sometimes also known as the trading income allowance. On this page we look at when you are entitled to claim the trading allowance and how it is applied.
The trading allowance has been introduced for the 2017/18 tax year onwards to exempt trading, casual and/or miscellaneous income of up to £1,000 per tax year from income tax. The allowance can be used against any trading, casual or miscellaneous income. This might include income from what is often known as the ‘sharing economy’ for example car sharing, or perhaps against income arising from hobby activities which are in the process of developing into a more commercial business.
You are entitled to claim the trading allowance if either:
(a) you use the cash basis of accounting, or
On this page ONLY we will now refer to trading income to cover both trading, casual and miscellaneous income.
Please note if you claim the trading allowance and you are repaying your student loan, then the income used to calculate your student loan repayments will be the amount after the trading allowance has been deducted.
What if I have trading income of less than £1,000?
If your total trading income in the basis period for the tax year is less than £1,000 then you have no taxable income from the activities. This means there is no need to prepare accounts and no need to include the income on your Self Assessment tax return. If this is your only source of taxable income there is no need to register for Self Assessment with HM Revenue & Customs (HMRC) in these circumstances. But there may be circumstances where you may still want to register, even if you don’t have to, for example:
- Because you want to pay voluntary Class 2 National Insurance contributions (NIC). You may want to do this to build up your entitlement to certain state benefits such as the state pension and contribution-based employment and support allowance.
- Because you want a record of your self-employment for maternity allowance
- Because you would like to claim tax-free childcare
If the trading allowance is more than the trading income, no trading loss is created.
You should be able to calculate your total income in the basis period from your business records.
Please note that even if you do not have to report this income to HMRC you may still need to report it for some means-tested benefits, such as universal credit.
What if I have trading income of more than £1,000?
If your total trading income in the basis period for the tax year is more than £1,000 you can choose to deduct the trading allowance from the trading income instead of deducting your actual business expenses for the period. If you do this, the taxable profit from the activity will simply be the total income less the trading allowance. For example, if Sarah has total income of £1,700 from selling home-baking at local monthly farmers markets in 2019/20, and she decides to claim the trading allowance, her taxable profit from this is £700.
It would be beneficial to claim the trading allowance in this way, called partial relief, if you do not have very high expenses related to the activity. It also means that you do not need to prepare any business accounts for tax purposes.
If you are claiming partial relief then you will not be able to claim tax relief for any pre-trading expenditure.
It will still be necessary to keep business records as you will need to know what your trading income is and it is helpful to know what your business expenses are to be able to work out whether or not you wish to claim the trading allowance.
If you have a taxable profit after claiming the trading allowance, you can find out how to report this to HMRC and how to pay tax on the profit in the section How do I pay tax on self employed income?. If you need to register for Self Assessment for the first time due to this income see the section How do I register for tax and National Insurance?.
Our trading allowance factsheet explains how you can claim partial relief on your Self Assessment tax return if you are using the self-employment short pages.
Please note that even if you do not have to report this income to HMRC you may still need to report it for some means tested benefits, such as universal credit.
If you have more than one type of trading, casual or miscellaneous income you can still only claim one trading allowance but you can choose how to allocate the allowance between your income sources. This is best illustrated by the example of Boris below. But remember you cannot claim tax relief for business expenses when you claim the trading allowance, so the effect of this needs to be considered too. It may not be beneficial to claim the trading allowance at all.
Boris has recently started his own self-employed web design business. He also buys and sells items on an online auction website from time to time. During the 2019/20 tax year his income and expenses were as follows:
Web design business:
Income £2,400 Expenses £700
Online auction sales:
Income £1,100 Expenses £900
Boris can choose how to use the trading allowance. His options are:
Claim the allowance against the web design income. This would mean he has a taxable profit of £1,400 from this source. But his profit from the online auction sales is £1,100, as he cannot deduct the expenses of £900 if he claims the trading allowance. So his total taxable profits are £2,500.
Claim the allowance against the online auction sales. This would mean his taxable profit from this source would be £100. His profit from the web design business is £2,400, as he cannot deduct expenses of £700 if he claims the trading allowance. So his total taxable profits are £2,500.
Not claim the trading allowance at all. This would mean he has taxable profit of £1,700 from the web design business and £200 from online auction sales. So his total taxable profits are £1,900.
It is best for Boris not to claim the trading allowance at all as this gives him the lower taxable profits overall.
For a further illustration of this see the Jay example on our trading allowance factsheet.
If the trading allowance is not relevant to you then you will need to prepare a set of accounts for your business and then make tax adjustments for business expenses that are not allowable and for capital allowances.
Where can I find more information on the trading allowance?
Our trading allowance factsheet provides more information and examples on this allowance and explains how it works if you are claiming tax credits, universal credit or repaying your student loan.
Our guide to self-employment is intended to supplement the material in this section. We wrote this guide to help advisers (non-tax) who advise low-income self-employed individuals and also for self-employed people who want more detailed information in one accessible place. The guide explains the less common tax rules and contains more detailed information including a case study showing how to prepare accounts and what to include on your tax return using the cash basis.
There is further information on the trading allowance on HMRC’s Business Income Manual on GOV.UK.