The trading allowance is a flat £1,000 a year that HMRC lets you earn from self-employment or casual work without any tax to pay and, in most cases, without any paperwork. It has existed since April 2017. It covers the small stuff: a bit of freelance work, selling things you make, odd jobs, tutoring, a market stall you run a few weekends a year.
If you earn £1,000 or less
This is called full relief. Your gross self-employed income for the tax year is £1,000 or under, the allowance wipes it out, and you have nothing to report: no registration, no return, no tax. Keep a rough record of what came in anyway, because the moment a future year goes over £1,000 the picture changes and you will want to know where you stood.
"Gross" means the total before costs. If you were paid £1,000 and spent £300 on materials, you are still within full relief because the £300 does not come into it here.
If you earn more than £1,000
Two things happen.
First, you have to register for Self Assessment by 5 October after the end of that tax year, and file a return.
Second, on that return you choose how to reduce the income you are taxed on. Either you claim the flat £1,000 allowance and ignore your real costs, or you claim your actual business expenses instead. You cannot do both, and you make the choice fresh each year.
The maths decides it. If your real expenses for the year are under £1,000, take the allowance and you are better off. If they are more than £1,000, claim the actual expenses.
Two quick examples for a tax year:
- Turnover £4,000, real expenses £600. Claim the £1,000 allowance, get taxed on £3,000. Claiming the £600 of expenses would have left £3,400, so the allowance wins.
- Turnover £4,000, real expenses £2,300. Claim the actual expenses, get taxed on £1,700. The allowance would only have knocked off £1,000.
There is a full breakdown of what counts as an expense in what can I claim.
When you cannot use the trading allowance
The allowance is blocked if the income comes from:
- A company that you, or someone connected to you, owns or controls.
- A partnership where you or a connected person are a partner.
- Your own employer, or your spouse or civil partner's employer.
The point of these rules is to stop people converting a salary into "trading income" to grab a tax-free £1,000. If your side work is for a genuinely unconnected client, you are fine.
It is separate from the property allowance
There is a second £1,000 allowance for rental and property income. They are different allowances with the same value. You can use both in the same year if you have both types of income, but you cannot stack two allowances against one source.
The catch with losses
If your self-employment made a loss and you want to record that loss to use against other income or carry it forward, you cannot also claim the trading allowance for that year. Claiming the allowance means you give up the loss. For most people with small side income this never comes up, but if you spent heavily to get started it is worth knowing.