A Guide About Understanding the Trading Allowance on Gross Income Tax
Home / Trading Allowance Guide
Recent Blog
Subscribe to Newsletter
There are many people who earn money through self-employment, casual services, or side gigs; for them, the trading allowance is an important tax relief to consider. It is important to have knowledge about the trading allowance before becoming a part of any venture. The UK government offers this allowance to help individuals manage their tax obligations efficiently. But how does it work? And should you claim the trading allowance or use actual expenses instead? This guide by MMBA Accountants experts shed light on trading allowance.
This blog talks about everything you need to know about the £1,000 trading allowance. Moreover, it includes how it impacts taxable income, self-assessment tax returns, and if it’s beneficial to claim or not.
Table of Contents
What Is the Trading Allowance?
The trading allowance is a tax exemption that simplifies tax reporting for small-scale traders, gig workers, and side hustlers. It also depends on your gross trading income. For example: if your gross trading income (your total earnings before deductions) is £1,000 or less per tax year then you won’t need to pay tax or complete a tax return for that income.
This means:
- If your income is £1,000 or less, it is tax-free, and you don’t need to declare it to HMRC.
- If your gross income exceeds £1,000, you can still use the trading allowance to reduce your taxable profit.
However, you must carefully assess if claiming the £1,000 trading allowance is right for you or the actual expenses.
Who Can Use the Trading Allowance?
You can claim the trading allowance if you earn money from:
Self-employment
If you work as a freelancer, contractor, or run a small business.
Casual services
Such as babysitting, tutoring, or selling handmade crafts.
Miscellaneous income
Like selling items on eBay, Etsy, or running a small online store.
Property income
If you make £1,000 or less from renting out a property.
However, you cannot claim the allowance if you earn through an employer (as part of your employment income) or if capital allowances already covers your income.
Contact MMBA experts to know more about
the trading allowance!
Call us Today
Should You Claim the Trading Allowance or Deduct Actual Expenses?
If you earn over £1,000 in self-employed income, you can either:
- Claim the trading allowance of £1,000, meaning you don’t need to keep records of your expenses.
- Deduct actual business expenses from your income to calculate your taxable profit.
Example 1: When the Trading Allowance Is Beneficial
- A person runs a small cake business and earns £1,500 per tax year.
- His business expenses (ingredients, packaging, advertising) total £600.
- If he uses the trading allowance, his taxable profit is £500 (£1,500 – £1,000).
- If he deducts actual expenses, his taxable profit is £900 (£1,500 – £600).
- Since £500 is lower than £900, he chooses to claim the trading allowance.
Example 2: When Actual Expenses Are Better
- Someone is a freelance photographer, and he earns £10,000 per tax year.
- His actual business expenses (equipment, travel, insurance) total £5,000.
- If he uses the trading allowance, his taxable income is £9,000 (£10,000 – £1,000).
- If he deducts actual expenses, his taxable income is £5,000 (£10,000 – £5,000).
- Since £5,000 is lower than £9,000, he chooses to claim expenses instead of the allowance.
Trading Allowance Affect Tax
If your gross trading income exceeds £1,000 per tax year, then you must report your income to HMRC by filing a self-assessment tax return.
Step 1: Register for Self-Assessment
If you’re earning from self-employment, property income, or casual services, you must register for self-assessment with HMRC before 5th October following the end of the tax year.
Step 2: Complete a Self-Assessment Tax Return
When completing your assessment tax return, you can either:
- Claim the trading allowance, deducting £1,000 from your earnings.
- Deduct your actual business expenses if they exceed £1,000.
Step 3: Calculate and Pay Tax
Your taxable income (after deductions) is subject to income tax based on UK tax bands:
£12,570 or less: No income tax (covered by personal allowance).
£12,571 to £50,270: 20% basic rate tax.
£50,271 to £125,140: 40% higher rate tax.
If you earn above £1,000 but remain within the personal allowance, you still need to complete a tax return, but you won’t need to pay tax.
Trading Allowance and Other Income
Trading allowance and other income includes
Trading Allowance vs. Employment Income
If you earn both self-employed income and employed income, you must report all income on your tax return. You can use the trading allowance for self-employment but still pay income tax on your salary.
Trading Allowance and Maternity Allowance
Claiming the £1,000 trading allowance does not affect maternity allowance, but it could impact universal credit and tax credits.
Trading Allowance and Student Loans
If your self-employed income exceeds the student loan repayment threshold, you must declare it and make repayments through your self-assessment tax return.
- The trading allowance of £1,000 is ideal for small-scale traders and gig workers.
- If your income is £1,000 or less, you don’t need to pay tax or declare it.
- If your gross income exceeds £1,000, you can claim the trading allowance instead of actual expenses.
- If your actual business expenses are higher than £1,000, it’s better to deduct them instead of claiming the allowance.
- You must complete a self-assessment tax return if your earnings exceed £1,000.
By understanding how to use the trading allowance effectively, you can reduce your taxable income, simplify tax reporting, and make the most of your self-employed earnings.
Conclusion
The trading allowance is a simple yet valuable tax relief for self-employed individuals, gig workers, and small-scale traders. It helps reduce taxable income and ease tax reporting, but it’s crucial to determine whether claiming it or deducting actual expenses is more beneficial. If your income is £1,000 or less, you don’t need to worry about tax; otherwise, careful assessment is necessary. Understanding how the allowance interacts with tax bands, self-assessment, and other income sources ensures better financial planning. By making informed choices, you can maximise your tax savings and keep your self-employment journey hassle-free.
Frequently Asked Questions (FAQs)
Who is eligible for the trading allowance?
The trading allowance applies to individuals earning money from self-employment, casual services, or small business activities. It covers income from freelancing, online sales, and property rentals (up to £1,000). However, employees receiving income from an employer or those using capital allowances cannot claim it.
Do I need to report income under £1,000 to HMRC?
No, if your total gross trading income is £1,000 or less in a tax year, it is tax-free, and you don’t need to report it to HMRC. However, if you earn over £1,000, you must complete a self-assessment tax return and decide whether to claim the trading allowance or deduct actual expenses.
Can I claim both the trading allowance and actual expenses?
No, you must choose one. If your business expenses are lower than £1,000, the trading allowance is more beneficial. However, if your actual expenses exceed £1,000, it’s better to deduct them instead, as this will reduce your taxable profit more effectively.
Does claiming the trading allowance affect other benefits?
It does not impact maternity allowance but can affect universal credit and tax credits. If your self-employed income is above the student loan repayment threshold, you must declare it and make repayments through your self-assessment tax return.
How does the trading allowance impact tax calculations?
If your gross income exceeds £1,000, your taxable income depends on whether you claim the trading allowance or deduct expenses. The final taxable amount is subject to UK tax bands, meaning you may pay 20%, 40%, or 45% tax depending on your total earnings.
Facebook
Twitter
LinkedIn