Tax Tip for the Self Employed: HMRC £1,000 Trading Allowance

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HMRC £1,000 Trading Allowance for Self Employed & Freelancers

The HMRC £1,000 Annual Tax Allowance is a great little tax break that can really benefit you if you are newly self employed or just getting started with your side hustle.

What is the HMRC £1,000 Annual Trading Allowance

The HMRC Annual Trading Allowance is available to everyone who earns an untaxed self employment income of £1,000 or less. Those that fall into this category can choose to not tell HMRC about this income or even register as self employed, avoiding the need to submit a Self Assessment Tax Return (depending on their status).

Definitions:

  • Income means the amount you receive before deducting costs and expenses
  • Annual means tax year, which runs 6 April to 5 April

Who Can Benefit from the HMRC £1,000 Annual Trading Allowance

Everyone is entitled to make a claim for the Trading Allowance and it will really suit people who:

  • Are newly self employed;
  • Starting a side hustle while holding down a full time job;
  • Those who make a small amount of money from things like eBay, Etsy, Babysitting, Gardening, Blogging.

How to Claim the HMRC £1,000 Annual Trading Allowance

If you do not currently submit a tax return then you don’t need to do anything to claim for the trading allowance but you must keep records of your income and expenses to evidence that you are entitled, should HMRC ever ask. Consider setting up a spreadsheet and make sure you file all your business receipts. You should also keep an eye on your income because once it goes above the trading allowance you will need to register for Self Assessment by 5 October in the business’ second tax year.

If you are already registered for self assessment for another reason for example you are a landlord, then you must still continue to submit your tax return as well as including your income within the self employment section of your tax return.  You’ll need to submit a CWF1 Form Online to let HMRC know you have self employment income and when it comes to filling out your tax return you’ll need to enter your income.  To claim the allowance simply show you income within the turnover section and your allowance claim as an expense to reduce your income to zero or by £1,000.

Is the £1,000 Annual Trading Allowance Right for You

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 Trading Allowance:

  • 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;
  • If you are newly self employed or planning to grow your business you may want to choose to claim your actual expenses to generate a tax loss which you can set off against your future business profits;
  • You cannot claim the allowance if your income is from employment, a partnership or a company you own;
  • You cannot use the £1,000 trading allowance to generate a tax loss;
  • Say you have two forms of income, for example you do some 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 actual expenses across both babysitting and gardening.

As always, seek professional advice if you are unsure of how the HMRC Trading Allowance works and whether it is right for you.

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