What is the trading allowance?

Definition of trading allowance

The trading allowance is an allowance of £1,000 that’s available to some sole traders.

As of 6th April 2017, if you’re a sole trader with income from your business of under £1,000 a year, then you don’t have to register for Self Assessment with HMRC, or pay tax on your business income.

If your income is over £1,000 a year, you still have to register with HMRC, but you can use either the trading allowance of £1,000, or your actual business expenses and capital allowances, against your income to work out your profit. You can’t use both the trading allowance and your actual costs against your income - you have to use one or the other.

The trading allowance isn’t available to partnerships, partners, or limited companies.

Examples

Janelle has just set up in business as a dog-walker. She earns £750 a year from this and all her other income comes from her full-time employment. Janelle doesn’t have to register with HMRC as a sole trader or pay tax on her business profit, because her income from her business is under £1,000.

Dured is a self-employed photographer. He earns £1,750 income a year from his business and incurs expenses of £600. Using his actual expenses figure would make his profit £1,750 - £600 = £1,150. Using the trading allowance instead of actual expenses would make his profit £750. In order to make his profit lower and save tax, Dured uses the trading allowance to work out his profit.

Ross is a self-employed graphic designer. He earns £1,750 income a year from his business and incurs expenses of £1,100. Using his actual expenses figure would make his profit £1,750 - £1,100 = £650. Using the trading allowance instead of actual expenses would make his profit £750. In order to make his profit lower and save tax, Ross uses his actual costs to work out his profit, and does not use the trading allowance.