What is the Trading Allowance?

The Trading Allowance enables people/sole traders to earn up to £1,000 a year tax-free. However, if you claim the Trading Allowance, you can’t claim allowable tax expenses for things you buy to start and run your sole trader business. So, if your business expenses are more than £1,000 in a tax year, you should claim tax expenses via your Self Assessment tax return, you should not claim the Trading Allowance, which is better suited to those with few tax expenses who earn a small amount of casual or miscellaneous income.

The Trading Allowance cannot be applied to income earned from an ordinary business partnership. If you use the trading allowances, you must keep a record of your income (eg copies of your invoices, bank statements or deposit pay-in records, a book detailing appointments and income with dates, emails confirming income received, etc). You may have to pay an HMRC penalty if your trading records are not accurate, complete and readable or if you do not retain them for the required period of time (ie five years).

You can claim both the Trading Allowance and the Property Allowance, if you’re a sole trader and landlord, as well as your Personal Allowance. If your annual gross trading income (ie total trading income before any expenses are deducted) is £1,000 or less, from one or more trades, you may not have to report your income to HMRC via Self Assessment, unless you cannot use the Trading Allowance or you’re required to register for Self Assessment and declare your income via a Self Assessment tax return.