Trading Allowance: How and when to claim it and Three Potential Traps.
SOLE TRADERS
Also known as the trading and miscellaneous income or hobby allowance, it is tax free allowance of up to £1,000 available to any sole trader with trading and or miscellaneous income in each tax year.
The allowance can be used against any trading, casual or miscellaneous income and it means you do not have to pay income tax or National insurance on any income covered by the allowance. This might include income from the sharing economy ( e.g. car sharing) or from the gig economy and is in addition to the annual personal allowance.
You can claim the trading allowance regardless of the accounting method (i.e. cash or accrual basis ) you use when you prepare your sole trader accounts.
The trading allowance is available in full even if you only traded for part of the year. For example, if you started to trade in January 2025, you would still be able to claim the full £1,000 as if you have been trading for the entire 2024/25 tax year.
If your total or gross sole trader income in the tax year is £1,000 or less, the whole of this income can be covered by the trading allowance. This is known as full relief.
For example, Julia has a bee hive which she started as a hobby but in the 24/25 tax year the bees produced some much honey, she decided to bottle them and sell as a boot sale. Because the honey was so good and locally made, she was able to sell 67 jars at £12.50 each, making £837.50. The hive she bought a few years back when she started out paying just £250 and the suit was just £120. She can claim the £1,000 trading allowance against her income of £837.50. If this is her only source of sole trader or miscellaneous income then she does not need to register for self-assessment or declare this income to the HMRC
It is important to note that if the trading allowance is greater than the trading or miscellaneous income, no trading loss is created.
You will not need to complete a self -assessment tax return if this is your only income and your income is not more than £1,000, but if you need to complete a self-assessment tax return for any other reason, then you can enter your trading allowance in the self -employment section of the tax return to show the amount you are claiming.
It is advisable that you 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.
What if your trading income is more than £1,000?
If your total gross trading income (before deducting any expenses) in 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 year. Claiming the trading allowance in this way is known as partial relief.
So full relief is when the income is less than £1,000 and you claim the £1,000 allowance and partial relief is when your income is greater than £1,000 and claim the £1,000.
Using our previous example, but this time Julia makes £2,150 from selling her jars of honey and all her costs remained the same – the bee hive @ £250, and bee suit @ £120 (total expenses of £370). She decides to claim the trading allowance, her profit will be £1,150 ( £2,150 - £1,000) instead of £1,780 (£2,150 - £250 - £120). So, 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 you don’t need to prepare any formal business accounts for tax purposes.
One important thing to bear in mind is that if you are claiming partial relief, you will not be able to claim tax relief on any pre-trading expenditure.
Once your self-employment income is more than the £1,000 trading allowance, HMRC say you must register your self-employment and complete a self-assessment tax return and enter the trading allowance in the self-employment section of the tax return.
Please not that if you claim universal credit, you need to report your actual income and expenses as you are not allowed to claim the trading allowance for universal credit purposes.
Working out your Gross Trading Income:
Your gross trading income is all your trading, miscellaneous and casual income before taking off any expenses.
Identifying your correct gross income can sometimes be tricky, particularly if charges are deducted before you receive the income such as when you sell online and the selling fees have already been deducted from the amount that is paid to you. Let’s look at an example below:
Daria is self employed and receives a payment of £946 direct to her bank from an online trading platform where she sells her paintings. The trading platform charges 14% fees to sell Daria’s painting and they deduct this from the selling price of her painting before they pay her.
£946 is her net income and her gross income is therefore £1,100 and the platform costs was 14% * £1,100 = £154.
Because Daria’s gross trading income is more than £1,100 and although she can claim the £1,000 trading allowance, she will still need to complete a self-assessment tax return and declare the £50 profit on her self-employment.
So, it is important to be very careful when using apps or any other technology to track your income 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 14% selling fees in the example we have just looked at) The app will then produce an inaccurate calculation of your gross income which could lead to an incorrect claim for the trading allowance.
If you have claimed the trading allowance incorrectly, you will need to correct your tax position as soon as possible. This may mean you have to register for self-assessment with HMRC and complete a tax return to declare the income. There may be penalties if you miss the deadline for telling HMRC that you need to complete a tax return.
If you already complete a tax return and claimed a full relief by mistake, you will need to amend your tax return to include this income.
Three Reasons Not to claim the £1,000 trading Allowance:
You have more than one trading business or casual income: You could end up paying more tax than you have to if your combined business expenses are more than £1,000 but you claim the £1,000 allowance instead.
If your expenses are more than your income then you have a trading a loss. With a trading loss it will be beneficial to complete a self-assessment tax return and make a claim for the losses rather than use the trading allowance. The crucial thing to remember here is that you cannot use the trading allowance to create a loss.
You have business expenses greater than £1,000. It will be more tax efficient for you deduct your actual business expenses from your income. This will result in a lower taxable income and ultimately less tax for you to pay. The only downside is that you will need to keep business records but as a business owner, it is a good idea to keep good business records.
What if you have more than one source of self-employed income?
You can only claim one trading allowance of £1,000 in a tax year regardless of the number of sources of self-employment income you have. However, you can choose how to allocate the allowance between your sources of income.
Let’s look at some examples
Rebecca has recently started self-employment as a social media marketing assistant but also has another side hustle of selling beauty products online. During the 2024/25 tax year her income and expenses are as below:
Social Media Marketing
Income £5,250
Expenses : £950
Online selling
Income: £1,375
Expenses: £425
Rebecca can choose how to use the trading allowance. Her options are:
1. Claim the allowance against the social media marketing business. This means she will have taxable profit of £4,250 (£5,250 - £1,000) from her social media marketing business. Her profit from the online selling business will be £1,375 as she cannot deduct the £425 actual business expense as she has claimed the £1,000 trading allowance. Her total taxable profit from both sources of income liable to tax and National insurance will be £5,625. (£4,250+£1,375)
2. Claim the allowance against her online selling income: This means her taxable profit from selling online will be £375 (£1,375 - £1,000) and her profit from social media marketing will be £5,250 as she cannot deduct the £950 of business expenses. Her total profit subject to tax and national insurance will be £5,625 (£375 + £5,250)
3. Not claim the trading allowance at all, but instead claim the actual costs, in which case her profit will be £5,250 + £1,375 - £950 - £425 = £5,250. This is definitely her best bet as it gives her the lowest taxable profits overall.
Trading Allowance and Universal Credits.
If you are claiming Universal credit, you cannot use the £1,000 trading allowance. In this instance you are required to provide details of your actual self-employed income and expenses to the Department for Work and Pensions.
If you would like to see how to draw up your business accounts if you are thinking of using actual business expenses then check out our blog post on the best business records to keep.
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Blog content is for information purposes only and over time may become outdated as the tax landscape is constantly changing, although we do strive to keep it current and up to date. It is written to help you understand your Taxes and is not to be relied upon as professional accounting, tax and legal advice. For additional help please contact our support team or HMRC.