HMRC launched the trading income allowance on the 6 April 2017. It was designed as part of efforts to make the tax system a little easier for UK individuals to earn a certain amount of money tax-free every tax year.
This guide will help you to understand what the Trading Allowance is all about, work out whether you are eligible and, crucially, why certain individuals may be better off not claiming it at all.
[This is part of the Understanding Self Employment Series]
Table of Contents
- 1.What is the Trading Income Allowance?
- 2. What is the Property Income Allowance?
- 3. FAQs
1. What is the Trading Income Allowance?
- Don’t need to tell HMRC about this income;
- Avoid needing to register as self-employed with HMRC and fill out a tax return;
- Can earn it tax-free and in some cases, alongside their personal allowance.
It is perfect for UK individuals who want to test an idea out before they set up a business, have a side hustle or just want to top up their main income with things like:
The income covered by this tax-free amount is your ‘trading income’. That means the money you get paid before deducting costs and expenses, without any tax deducted from it but that would normally be considered taxable income.
All UK taxpayers are entitled to claim the tax-free allowance of £1,000 under the trading allowance rules but it can’t be claimed against:
- Money earned through a limited company or partnership;
- Employment or “PAYE” earnings.
1.1 How to Claim the HMRC £1,000 Annual Trading Allowance
The way you claim the trading allowance depends on your circumstances.
If you do not fill out a self-assessment tax return at the moment then you do not need to let HMRC know about what you have earned (as long as you keep evidence to demonstrate it is below £1,000). But you should consider setting up a simple spreadsheet and make sure you file all your business receipts so you can keep an eye on your untaxed income because once it goes above the trading allowance you will need to register as self-employed by 5 October in the business’ second tax year.
If do you fill in a tax return for another reason, then you’ll need to claim the trading income allowance when you come to complete your annual self assessment. You’ll need to submit a CWF1 Form Online to let HMRC know you have
To claim the £1,000 trading allowance you’ll need to fill out two boxes:
- Enter income within the turnover section;
- Enter the trading allowance claim as an expense to reduce your income to zero or by £1,000.
1.2 Other Rules You Need to Be Aware Of
Whilst the trading income allowance may sound generous and simple there are some specific rules around it that you should be aware of before you claim it:
- HMRC only allows you to claim the trading allowance OR actual expenses, not both. So before you elect to use the allowance check whether it is more beneficial to claim your actual expenses rather than the £1,000 allowance.
- You cannot claim the allowance if your income is from employment, a partnership or a limited company.
- You cannot use the £1,000 trading allowance to generate a tax loss.
- If you have two forms of income, for example from babysitting and some gardening, you cannot choose to use the trading allowance on your babysitting income and record actual expenses for your gardening work. You have to choose to claim for the trading allowance OR use the actual expenses for both your babysitting and gardening income.
1.3 Trading Income Allowance Examples
You are employed during the tax year 2018/2019 and earned money as an Uber driver of £500 during the same tax year. As this is below the trading income allowance, you do not need to register with HMRC or let them know about your earnings from Uber. You should keep records of all your Uber earnings though to show that you earned less than the £1,000 tax-free allowance.
You are a newly self-employed hairdresser during the tax year 2018/2019. You have not needed to spend any money on setting up your business but have earned £500 in income during the tax year. This is below the trading income allowance so you can use the £1,000 tax-free allowance against this income.
You are newly self-employed during the tax year 2019/2020 and have spent £2,000 on equipment to set up your new business and have earned £300 in income. You are entitled to claim for the trading income allowance as your taxable income was less than £1,000. However, you may not want to claim the allowance because your expenses exceed your income because if you register as self-employed and fill in a tax return you’ll be able to record a tax loss. Tax losses can be set against any future profits you make in later tax years, reducing how much tax you’ll pay later on.
You become self-employed in the tax year 2018/2019 and your income is £1,500. As this exceeds the trading income allowance you will need to register as self-employed and declare your income on a tax return. You’ll be able to choose between:
- Either claiming for the trading income allowance of £1,000 against your £1,500 income, leaving £500 profit which you may need to pay self-employment tax on or;
- Claim for your actual expenses.
Generally, people choose the option that results in them showing the lowest taxable profit, which results in a smaller tax bill, but remember you cannot claim for both the trading allowance and your expenses.
You have been a self-employed dog walker for many years, fully registered as self-employed with HMRC and filling out a tax return to declare your earnings annually. During the tax year 2018/2019, you did some gardening work on the side.
Your earnings for 2018/2019 were:
- Dog Walking Income £20,000/Expenses £5,000
- Gardening £500/Expenses £0
When tax time comes you cannot use the £1,000 trading allowance against your gardening income. You’ll need to fill out an additional self-employment section in your tax return for the gardening income and pay tax on the £500 accordingly. You must use the same method for all your forms of income.
You earn dividend and pension income each year and have been submitting tax returns by 31 January each year. During the tax year 2018/2019 you earn £750 doing consultancy work.
This is withing the trading income allowance of £1,000 so you do not need to pay tax on your extra income. But as you complete a tax return for other reasons you’ll need to complete a CWF1 and complete a self-employment section in your tax return. Here you can declare your £750 income and make your claim for the trading income allowance.
[This is part of the Understanding Self Employment Series]
2. What is the Property Income Allowance?
The Property Income Allowance entitles individuals in the UK to earn £1,000 in rental income tax-free every tax year. Those that fall into this category can choose to not tell HMRC about this income and don’t need to register as a landlord meaning they can avoid the need to submit a tax return if they have no other income to declare to HMRC.
Rental income means money earned before deducting any costs (in other words turnover, not profit).
2.1 How to Claim the £1,000 Property Income Allowance
How you claim for the property income allowance depends on your personal situation.
If you do not currently submit a tax return then you don’t need to let HMRC know about your property income provided it is below £1,000. But you must keep records of your income to prove your income is below the £1,000 tax-free allowance.
You should also keep an eye on your income because once it goes above the trading allowance you will need to register as a Landlord by 5 October.
If you are already registered for self-assessment for another reason, for example, because you are self-employed, then you’ll need to claim for the property income allowance on your return.
To claim the allowance you need to show your rental income in the Landlord Section, showing what you have collected and your claim for the tax-free amount.
2.2 Other Rules You Need to Be Aware Of
As with most tax allowances you should make sure that claiming them is right for you and your situation both now and in the future.
Here are some considerations you must take into account before deciding to use the Property Income Allowance:
- If you own a property jointly with others, you’re each eligible for the £1,000 allowance against your share of the gross rental income;
- You are entitled to claim for both the trading income allowance of £1,000 AND property income allowance of £1,000;
- The allowance can be used towards foreign property rental income;
- You cannot use the £1,000 tax-free allowance to generate a tax repayment;
- If you are a new landlord who will have ongoing rental income, you may want to choose to claim your actual expenses to generate a tax loss which you can set off against your future business rental profits;
- You cannot claim the property income allowance on income from letting your own home if you are claiming allowances under the Rent a Room Scheme.
2.3 Property Income Allowance Examples
During the tax year 2018/2019, you collect rental income of £1750 from letting a property you jointly own. Your share of the income is £875. Therefore entitled to use the property income allowance of £1,000. That means you don’t need to pay tax on this income or register as a landlord with HMRC.
You are a new landlord and during the tax year 2018/2019 you collected £500 in rent but spent £2,000 on property repairs.
You are eligible to claim for the £1,000 property allowance. But as your rental loss is £1,500 you may prefer to register as a landlord and record your tax loss using a tax return. That way you can use the loss against future profits from the rental property to save you tax in later tax years.
Do You Need to Keep Records to Claim the Trading Income and Property Allowance?
Yes, you must keep records of any money that has been paid to you to demonstrate that your taxable income is below the £1,000 limit. You must keep these records for 6 years in case HMRC ever ask for them.
Can the Trading Allowance Create a Tax Loss?
No, you cannot use the trading allowance to create a tax loss on your tax return – you must either choose to claim expenses in full to create your tax loss or use the trading allowance.
Can You Claim the Property Income Allowance and Trading Income Allowance?
Yes, you can claim for both the property income and trading income allowance but depending on your circumstances you may need to claim this on a tax return.
Can You Claim the Trading Income Allowance and Expenses?
No, you cannot claim for both the trading income allowance and expenses you must choose which method you want to use, but you can change this between tax years to use the one that is the most tax-efficient for you.
Can You Claim the Property Income Allowance and Expenses?
No, just like the trading income allowance, you can only claim the £1,000 tax-free property allowance OR your property expenses.
What Happens Once You Exceed the Trading Income Allowance?
Once your trading income exceeds £1,000 you’ll need to:
- Register as self-employed by the deadline;
- Keep records of your income and expenses;
- Fill in a tax return by 31 January each year;
- Calculate your own self employment taxes, paying them over to HMRC along with a payment on account if necessary.
Do I Still Need To Make Student Loan Repayments if I use the Trading Income Allowance?
Any money you earn that falls within the trading income allowance will not be included when it comes to calculating your student loan repayments.
How Much Can I Earn Before Paying Tax?
You can not only earn £1,000 under the trading income allowance before you start paying tax, but you are also entitled to a personal allowance every tax year. This is the amount you can earn before paying tax and is currently £12,500 for 2020/2021. That means some people, for example, those who are employed and self-employed can earn £13,500 before they start paying income tax.
Does the Trading Income Allowance Affect the Benefits I’m Entitled to?
When you are self-employed the way in which you claim for benefit and tax credits changes. You may also find yourself unable to claim certain allowances. You’ll need to fill in a tax return as evidence of your earnings if you want to claim for:
That means even if you earn below the £1,000 tax-free amount you should register for self-assessment to declare your income. Don’t worry, you’ll have no tax to pay because you can still claim the trading income allowance. You’ll just need to fill out the paperwork.
Often unexpectedly if you are newly self-employed you may not realise that if you do not pay any Class 2 National Insurance contributions you will be affecting your ability to claim things like maternity allowance and the state pension. Even if you earn below the threshold for paying Class 2 National Insurance and are entitled to the trading income allowance, by not paying into the system you affect your ability to claim from it. It means many self-employed individuals opt to pay voluntary class 2 national insurance contributions.
[This is part of the Understanding Self Employment Series]
Updated 20 December 2020