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

Nick Daws explains what the trading allowance is and how you can benefit from it.

Today I’m featuring a tax-saving opportunity that may potentially be of interest to many Mouthy Money readers.

The tax-free trading allowance is a benefit for UK residents looking to earn extra income from trading or side hustles without worrying about declaring that income to the taxman (initially at least). 

This allowance – sometimes referred to as the trading income allowance – provides a threshold below which individuals can earn a certain amount from trading activities without needing to report it to HMRC or pay tax on it. 

Let’s explore what the allowance is, how it works and how to maximize its benefits.

What is the tax-free trading allowance?

The tax-free trading allowance, introduced in 2017, allows individuals to earn up to £1,000 per tax year from trading activities before paying income tax on it or declaring it. 

This allowance is available to any UK resident engaged in casual trading or so-called side hustles. It can be claimed by hobbyists, self-employed individuals, and even those in formal employment.

Who can use the allowance?

The trading allowance is available to:

Self-employed traders: Those earning casual income from selling products or services. That might include small-scale eBay sellers, people running craft stalls, those hiring out power tools or other items, or anyone else offering goods and/or services for profit.

Casual workers: People who supplement their income providing services such as gardening, lawn-mowing, DIY and repairs, dog walking, babysitting, and so on.

Gig economy workers: This would include driving for ride-sharing companies and delivery services, market research, mystery shopping, and other types of gig work.

Hobby traders: People who trade primarily as a hobby (e.g. sellers of handmade crafts or collectibles) without it being their primary income source. Freelance writers and photographers who occasionally sell work would also fall into this category.

This allowance is not limited by age or employment status, so it’s open to anyone over 18 in the UK who meets the criteria.

How does the tax-free trading allowance work?

The allowance allows individuals to earn £1,000 in trading income without the need to declare it to HMRC. Here’s a quick breakdown of how it operates.

Income below £1,000: If you earn less than £1,000 from your trading activities, you don’t need to report this income to HMRC, nor do you have to pay any tax on it. For those with low-income side businesses, this is especially useful as it minimizes the burden of income tax and cuts the need for form-filling and bureaucracy.

Income above £1,000: If your trading income exceeds £1,000, you have two options:

• Deduct allowable business expenses from your trading income and pay tax (if due) on your net income.
• Use the £1,000 trading allowance as a flat deduction from your gross income and pay tax on the remainder.

It’s important to note that you cannot claim both the £1,000 allowance and business expenses. You must choose one or the other.

How to claim the tax-free trading allowance

If your total trading income is under £1,000, no action is required. You do not need to register as self-employed or complete a self-assessment tax return. If you already do this, you don’t need to record this income on the form.

However, if you earn over £1,000 and wish to claim the allowance, you will need to:

Register for self assessment: Register with HMRC as self-employed if you haven’t already. You can do this online, and it’s essential to complete this step if you’re earning above £1,000 a year from trading activities.

File your tax return: Report your income through a self-assessment tax return and select the trading allowance instead of claiming business expenses. An accountant will advise you about this if required.

Choose the better option: Decide between claiming the allowance and deducting expenses. If your expenses are relatively high, it may be more tax-efficient to deduct them from your gross income rather than the trading allowance.

Maximizing the benefits of the trading allowance

Here are some tips on how you can make the most of the tax-free trading allowance:

Test a new business idea: The allowance is ideal for experimenting with a new business idea or side gig, as it gives you a hassle-free buffer period while you test profitability. If it doesn’t work out, nobody need ever know.

Keep accurate records: Ensure you keep records of your income, even if below £1,000, to provide clarity if questioned by HMRC. Record your expenses as well, in case you end up earning more than expected and need to register as self-employed.

Deduct the allowance if beneficial: Calculate if it’s more advantageous to deduct business expenses or use the £1,000 allowance. Some people find that opting for the allowance saves them more in tax, while for others deducting expenses from their gross income works out more tax-efficient. Be aware that you cannot use the tax-free trading allowance to create a taxable loss to offset against other income sources.

What about property businesses?

If you also (or alternatively) make money from a property-related business, the good news is that alongside the tax-free trading allowance, the government also provides a separate £1,000 tax-free property allowance. 

This allowance applies specifically to people earning a small income from property-related activities. That includes such things as renting out a room, letting out your driveway or garage, or short-term letting via platforms like Airbnb.

This allowance operates similarly to the trading allowance, allowing individuals to earn up to £1,000 per year of property-related income without needing to declare it or pay tax on it. 

It’s possible for an individual to benefit from both allowances. For instance, if you earn £1,000 from a small sideline business and £1,000 renting out a spare room or parking space, you can use both allowances and keep up to £2,000 tax-free.

Common questions 

1. Can I claim the trading allowance (or property allowance) on top of my personal allowance?

Yes, the trading allowance is separate from your personal income tax allowance (for most people this is £12,570 as of the 2024/25 tax year), meaning you can still earn other types of income tax-free up to this threshold.

2. Can I claim the allowance if I’m employed full-time?

Absolutely. The trading allowance is available to everyone regardless of employment status. It’s a way to encourage side businesses and casual trading.

3. What if I have multiple income streams?

The allowance can cover different income streams, but each individual can only claim one £1,000 trading allowance and one £1,000 property allowance per year. 

So if you make £500 a year mowing lawns and £400 a year from online surveys, you can claim the total £900 tax-free under the trading allowance. But if you make over £1,000 in total that wouldn’t be the case and you would have to declare this as self-employed income.

4. What records do I need to keep?

While there are no strict rules about record-keeping, it’s important to track your earnings carefully to ensure you remain under the £1,000 threshold and accurately report any income over it. 

Even if you don’t exceed the £1,000 allowance, maintaining records of your income and business expenses is good practice and will make life much easier if your sideline business turns out to be more profitable than expected.

5. Where can I find more information?

If you’re unclear about any aspect of the tax-free trading or property allowances, the official government website should be your first port of call. If you’re still uncertain, I strongly recommend speaking to a qualified accountant. Tax can be complicated and everyone’s circumstances are different. A good accountant will be familiar with the rules and (just as important) how they are typically applied by HMRC.

Closing thoughts

The trading allowance is a flexible, tax-free cushion that can help you profit from casual trading or side gigs without added tax burdens. 

Whether you’re selling a few items online, earning from a hobby, or doing a few odd jobs for profit, it can help you keep more of what you earn and keep admin to a minimum. It can also be a great way to test out sideline money-making ideas, as regularly discussed in Mouthy Money.

By understanding how it applies to your activities, you can make the most of this valuable allowance and hopefully turn your side ventures into profitable additions to your income.

As always, if you have any comments or questions about this article, please do leave them below. But please note that I am not a qualified financial adviser and cannot answer specific queries about your personal tax circumstances.

Nick Daws writes for Pounds and Sense, a UK personal finance blog aimed especially (though not exclusively) at over-fifties.

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