What is the trading allowance and how can you benefit from it?

What is the trading allowance?

HMRC introduced the trading allowance in 2017 to make things simpler for individuals with low levels of trading income. 

It applies to any income from:

• self-employment, such as selling goods or services online, or providing freelance or consultancy work
• casual services, such as babysitting, gardening, dog walking, or tutoring
• hiring personal equipment, such as power tools, musical instruments, or sports equipment

How does the trading allowance work?

The trading allowance works in two ways and depends on how much trading income you have made in a tax year:

• If your total (gross) trading income is £1,000 or less, you do not need to report it to HMRC or pay any tax on it.  This is known as full relief.  However, you can still choose to report your income and expenses on a tax return if you want to.  You may choose to do this if you want to claim a loss or register for Class 2 National Insurance contributions.
• If your total (gross) trading income is more than £1,000, you can deduct the trading allowance from your income before calculating your taxable profit.  This is known as partial relief.  So if your trading income was £1,500, you would deduct £1,000 and pay tax on £500. Alternatively, you can choose to deduct your actual expenses instead of the trading allowance, if this would give you a lower taxable profit.

The trading allowance is available even if you only trade for part of the tax year. For example, if you start a new business in February 2024, you can still claim the full amount of the trading allowance for the 2023/24 tax year.

Who does the trading allowance apply to?

The trading allowance is available to anyone who has trading income from self-employment, casual services, or personal equipment hire. However, there are some situations where you cannot use the trading allowance, such as:

• If your trading income is from a partnership, rather than a sole trader
• If your trading income is from a trade that you also do as an employee, such as a teacher who also tutors privately
• If your trading income includes any amounts that are already tax-free, such as rent-a-room relief or property income allowance
• If you have claimed certain tax reliefs or allowances for your trading income, such as capital allowances, research and development relief, or enterprise investment scheme relief

You should also consider whether using the trading allowance is beneficial for you, as it may affect your eligibility for other tax benefits, such as:

• Tax credits and universal credit, which are based on your net income after deducting expenses, not the trading allowance
• Student loan repayments, which are based on your gross income before deducting the trading allowance
• State pension and other benefits, which depend on your National Insurance contributions, which are reduced if you use the trading allowance

How to claim the trading allowance?

If you are eligible and want to use the trading allowance, you need to report your trading income and expenses on a tax return.  This can be done online or by post, using the self-employment pages of the tax return.  You will need to fill in the following boxes:

• Box 15: Enter your total (gross) trading income for the tax year
• Box 16: Enter the amount of the trading allowance you want to claim, up to £1,000
• Box 31: Enter your taxable profit, which is your trading income minus the trading allowance
• Box 32: Enter ‘0’, as you cannot claim any other expenses if you use the trading allowance

If you have more than one source of trading income, you would need to add them together and use the same trading allowance for all of them.  You cannot use different amounts of the trading allowance for different sources of income.