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From 6 January 2024, the main rate of class 1 National Insurance contributions (NIC) deducted from employees’ wages is reduced from 12% to 10%. From 6 April 2024, the main rate of self-employed class 4 NIC will reduce from 9% to 8% and class 2 NIC will no longer be due. Those with profits below £6,725 a year can continue to pay class 2 NIC to keep their entitlement to certain state benefits. Our guidance will be updated in full in spring 2024.

Updated on 6 April 2023

Trading allowance

The trading allowance is available to those with trading or miscellaneous income. The allowance is sometimes also known as the trading and miscellaneous income allowance, or hobby allowance. On this page, we look at when you are entitled to claim the trading allowance and how it is applied.

Content on this page:

How it works

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.

You can use the trading allowance as well as the personal allowance. 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:

  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.

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If your trading income is £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. We explain under the heading Gross trading income below 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 with HM Revenue & Customs (HMRC) or complete a self assessment tax return. If you are already registered to complete a tax return, then contact HMRC 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:

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 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.

If your trading income is more than £1,000

If your total gross 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. Claiming the trading allowance in this way is called partial relief.

Example: Sarah

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 activity is £700.

It may be beneficial to claim the trading allowance in this way 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 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 our page Self-employment: registering for tax and NIC.

Please note that even where 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.

Gross trading income

Gross trading income means all your trading, miscellaneous and casual income before taking off any expenses.

Identifying the ‘gross’ amount of income can sometimes be tricky, particularly if charges are deducted before receiving the income directly into your bank account. Examples of such charges could be selling fees or transaction costs charged by a platform or even tax under the Construction Industry Scheme (CIS)

Example: Gabby

Gabby receives a payment of £892.50 direct to her bank account from a website which sells her craft goods. However, the website charges 15% fees to sell Gabby’s products (15% of £1,050 is £157.50) and they take this from the income from the sale of her goods before they pay her. Gabby’s gross trading income is actually £1,050 even though she only received £892.50 (£1,050 less website fees of £157.50).

Because her gross trading income is over £1,000, Gabby is not eligible for full relief trading allowance. HMRC will expect her to register for self-employment and complete a tax return. She can still claim the allowance on her tax return (instead of her actual expenses) which will reduce her trading income to £50 (£1,050 gross income minus the £1,000 trading allowance).

  Be extra careful when using apps to track your income, expenses and manage income tax.

If the app picks up the information directly from your bank account, there is a possibility it will record income which has had expenses deducted before it is paid into the bank (such as the 15% selling fees in the example of Gabby above). The app will then produce an inaccurate calculation of your gross income which could lead to an incorrect claim for the trading allowance.

More than one source of trading income

If you have more than one type of trading, casual or miscellaneous income you can still only claim one trading allowance. However, you can choose how to allocate the allowance between your income sources. This is best illustrated by the examples of Reece and Jay 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: Reece

Reece 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

Reece can choose how to use the trading allowance. His options are:

  1. Claim the allowance against the web design income. This would mean he would have 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. 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. 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. His total profits liable to tax and NIC are £1,900.

In this case, if Reece chooses not to claim the trading allowance, it gives him the lowest taxable profits overall.

Example: 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 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.

Reasons not to claim

Although it sounds like there should be no reason not to use the trading allowance, 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.
  • 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 Reece and Jay under the heading More than one source of trading income, above).

Incorrectly claimed the trading allowance

As explained under the Gross trading income heading above, it may be the case that the income you receive might have had amounts taken off and so it could be different to your gross income for the trading allowance. If you (or your app) have taken the amount from your bank statements as gross trading income, this might have been incorrect when working out how the £1,000 trading allowance applies.

If you have claimed the trading allowance incorrectly, perhaps by using full relief when your gross income is actually above £1,000, as in the example of Gabby above, then you need to make sure you correct your tax position as soon as possible.

This may mean you have to register your self-employment with HMRC and complete a tax return to declare the income. There may be penalties if you have missed the deadline for telling HMRC that you need to complete a tax return. If you are in this position and on a low income, contact TaxAid for help in getting your tax affairs up to date.

If you already complete a tax return for other reasons and claimed ‘full relief’ using the trading allowance by mistake, you will need to amend your tax return to include this income. You can however, then claim ‘partial relief’ of the trading allowance instead of actual expenses as explained under the heading If your trading income is more than £1,000, above.

You will also need to amend your tax return if you have incorrectly claimed ‘partial relief’ against income that has already been reduced by actual expenses.

Example: Madison

In the 2020/21 tax year, Madison received income in her bank account from online sales of £2,000. She worked out that her actual expenses she directly paid out were £800. Because the £1,000 trading allowance is more than the £800 expenses, she claimed trading allowance ‘partial relief’. This meant her taxable profit was £1,000 (£2,000 income minus the £1,000 trading allowance). She put this on the tax return she submitted to HMRC.

After reading this guidance, Madison looks back at her £2,000 sales and realises that this was the amount she received in her bank account and there had been £400 in fees taken off before she received it. This means her gross trading income was £2,400. Madison’s total expenses were £1,200 – the £400 fees plus the other £800 expenses she had already included.  

This means that Madison’s 2020/21 tax return should have showed total gross trading income of £2,400, minus £1,200 expenses, which leaves a profit of £1,200. Actual expenses should have been claimed instead of trading allowance partial relief as the actual expenses of £1,200 are more than the £1,000 trading allowance. Madison’s profit was therefore £200 higher than the £1,000 she put on her tax return. She needs to amend her 2020/21 tax return.

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.

Example: Thea

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 less £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.

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.

More information

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 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, what to include on your 2022/23 tax return, how to treat pre-trade expenses and how to use the cash basis.

We cover examples of miscellaneous income on our taxable income page.

GOV.UK has information on keeping business records if you claim the trading allowance and there is further information on the trading allowance on HMRC’s Business Income Manual on GOV.UK

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