What is the trading allowance?

What is the trading allowance?

The trading allowance exempts trading, casual and/or miscellaneous income of up to £1,000 per tax year from income tax and National Insurance contributions. 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. It might also be relevant to those working in the gig economy.

It is not an automatic allowance like the personal allowance and so may need to be specifically claimed in some circumstances.

You are entitled to claim the trading allowance if either:

(a) you use the cash basis of accounting, or

(b) you use the accruals basis of accounting but are eligible to use the cash basis.

On this page ONLY we will now refer to trading income to cover trading, casual and miscellaneous income.

The trading allowance is available even if you have only traded for part of the tax year. For example, if you started to trade in February 2023 you would still be able to claim the full amount of the trading allowance as if you had been trading for the entire 2022/23 tax year.

What if I have trading income of £1,000 or less?

If your total (gross) trading income in the basis period for the tax year is £1,000 or less then the whole of this income can be covered by the trading allowance. This is known as full relief. You should be able to calculate your total income in the basis period from your business records.

For example, if you have sold some home-made jam for £250 and hired out some garden tools for £125 then the total of your trading and casual income is £375. As this is below the trading allowance limit of £1,000 you can use £375 of the allowance.

It is important that you look at total (gross) trading income to see if it is £1,000 or less. Our news article explains when you might find it difficult to identify your ‘gross’ trading income, particularly if some expenses such as selling fees are deducted before the income is paid into your bank account.

If the trading allowance is more than the trading income, no trading loss is created.

If this is your only income you do not need to make a formal claim for the allowance and you do not need to register your self-employment trade with HMRC or complete a Self Assessment tax return. If you are already registered to complete a tax return then call HM Revenue & Customs (HMRC) on 0300 200 3310 to see if you still need to complete it.

However, 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, maternity allowance 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 you need to complete a Self Assessment tax return for another reason (such as the ones listed above) then you claim the trading allowance on page 1 of the self-employment (short) pages (SA103S) of the tax return by completing box 10.1 to show the amount you are claiming.

You should still keep records of your trading income and expenses so you can work out whether or not you are entitled to use the trading allowance, and if so, whether you want to do so.

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 (before deducting any expenses) 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 2022/23, 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. For example, if you run a dog-walking business and you make £1,400 during the tax year and have expenses of £150 then you can claim the trading allowance of £1,000 instead of your business expenses of £150 (you cannot claim both!) and your taxable income will only be £400 instead of £1,250.

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.

As your income is above the trading allowance HMRC say you must register your self-employment and complete a Self Assessment tax return. You can claim the trading allowance when you complete your tax return on page 1, box 10.1 on the self-employment (short) pages (SA103S) of the tax return. 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?. 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?.

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 happens if I have more than one source of trading, casual or miscellaneous income?

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.

Example

Boris has recently started self-employment running his own web design business. He also buys and sells items on an online auction website from time to time. During the 2022/23 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:

1. 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 profits liable to tax and National Insurance contributions (NIC) are £2,500.
2. 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 profits liable to tax and NIC are £2,500.
3. 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 profits liable to tax and NIC 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 below.

Jay

Jay is self-employed as a graphic designer and has sales of £25,000 and expenses of £1,500 for the 2022/23 tax year, making a profit of £23,500. She also makes gift cards and has sales of £900 and associated business costs of £800.

Jay does not realise that the trading allowance must be applied to all her self-employed activities and makes a claim for the trading allowance, assuming it will just go against her card-making business only. However, this is not the case and by claiming the allowance she will only get a deduction for £1,000 rather than her actual expenses of £2,300 (£1,500 + £800). Therefore, unless she amends her tax return she will miss out on tax relief on £1,300 of business expenses (£1,500 + £800 = £2,300 less £1,000 allowance = £1,300). Assuming Jay is a basic rate taxpayer this error could cost her extra tax of £260 as well as extra Class 4 National Insurance contributions.

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.

Why might I not want to claim the trading allowance?

On the face of it, it sounds like there should be no reason not to use the trading allowance; however, it may not be beneficial for you to do so in certain circumstances. These include:

• You have business expenses greater than £1,000. In this case you will have less taxable profit if you deduct your expenses from your trading income rather than the trading allowance and therefore will pay less tax!
• You have made a trading loss. If your expenses are greater than your income, it will be beneficial to complete a Self Assessment tax return and make a claim for the losses rather than use the trading allowance. You cannot use the trading allowance to make a loss. We explain about losses in our section What if I make a loss?.
• You have more than one trading business and/or type of casual income. In this case you need to ensure that your total expenses are less than £1,000 otherwise you could end up paying more tax (see the examples of Boris and Jay above).

How does the trading allowance work with tax credits and universal credit?

If you claim tax credits, the income used to calculate your tax credits should be after taking account of any deduction for the trading allowance; this is because the information about your income which you provide to HMRC for your tax credits claim will generally be the same as the information you use when completing your Self Assessment tax return.

If you do not need to register your trading income with HMRC because it is under £1,000 then you will not need to let the HMRC tax credits team know about it either.

Universal credit (UC) works differently, and you cannot deduct the trading allowance when providing your income to the Department for Work & Pensions (DWP). The income used when calculating your UC will be higher than the income used when calculating your tax as the trading allowance is ignored when calculating your UC claim.

For example, Thea has income from hairdressing of £3,000 and expenses of £425, making an accounting profit of £2,575. For income tax purposes she will be entitled to the trading allowance and so her taxable income is £2,000 (£3,000 - £1,000). If she claims tax credits she should report income of £2,000; however if Thea was receiving UC then she would have to report income received less expenses paid out in her monthly assessment period. The trading allowance would be completely disregarded in calculating her UC award and would make no difference to the figures she needs to report to DWP for UC purposes.

How does the trading allowance affect my student loan repayments?

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.

In other words, the calculation of your loan repayments follows the tax treatment of your trading and casual income. So, if you have a Plan 2 loan and employment income of £29,000 and casual income of £750 which is fully relieved by the trading allowance, only £29,000 (and not £29,750) will be used when calculating your student loan repayments above the repayment threshold.

Where can I find more information on the trading allowance?

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 2022/23 tax return using the cash basis.

Our news article ‘Are you using the trading allowance correctly?’ explains about some common mistakes that can be made when using the trading allowance and what to do if you have made a mistake when claiming it.

There is further information on the trading allowance on HMRC’s Business Income Manual on GOV.UK.