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  • Writer's pictureXero Queen

What is the trading allowance?

The introduction of the trading and miscellaneous income allowance back in 2017/18 broadly speaking means that, those with trading income of less than £1,000 in a given tax year, no longer need to report it to HMRC.

The trading allowance remains at £1,000 for 2021/2 and exempts trading, casual and/or miscellaneous income of up to £1,000 per tax year from income tax and National Insurance contributions. The allowance can be used against any trading, casual or miscellaneous income. This may be particularly useful for people with casual or small part time earnings from self-employment, for example, someone who up-cycles old furniture for resale on eBay or perhaps against income arising from hobby activities which are in the process of developing into a more commercial business. This might also include income from what is often known as the ‘sharing economy’ for example car sharing and may also be relevant to those working in the gig economy.

This is not an automatic allowance like the personal tax allowance and as such it may need to be specifically claimed in some circumstances.

You are entitled to claim the trading allowance if either:

(a) you use cash basis accounting, or

(b) you use accrual accounting but your income is such that you qualify to use the cash basis.

The trading allowance is available even if you have only traded for part of the tax year. For example, if you started to trade in February 2022 you would still be able to claim the full amount of the trading allowance as if you had been trading for the entire 2021/22 tax year.

What if I have trading income of £1,000 or less?

If your total (gross) trading income in the tax year is £1,000 or less then the whole of this income can be covered by the trading allowance. This is known as full relief.

For example, if you have sold some home-made celebration cakes for £350 and hired out some kitchen equipment for £125 then the total of your trading and casual income is £475. As this is below the trading allowance limit of £1,000 you can use £475 of the allowance.

It is important that you look at total gross trading income to see if it is indeed £1,000 or less, ensure you pay particular attention to this especially if selling fees are deducted before the income is paid into your bank account. It is the gross selling price that needs to be considered here not the net amount received after fees.

If this is your only income source you don't need to make a formal claim for the allowance or register your self-employment trade with HMRC so in these circumstances there is no need to complete a Self Assessment tax return. Unless either of the following apply to you:

  • you have claimed the Self-Employment Income Support Scheme (SEISS).

  • If you are already registered to complete a tax return then contact HMRC to see if you still need to complete it.

That said however, there may be circumstances where it may be beneficial to register for Self-Assessment even if you don’t have to, for example:

  • To pay voluntarily pay Class 2 NI - You may wish to do this to build up your entitlement to certain state benefits such as the state pension.

  • To have a record of your self-employment for maternity allowance.

  • So that you can claim tax-free childcare.

If you need to complete a Self Assessment tax return for another reason (such as the ones listed above) then you claim the trading allowance on page 1 of the self-employment (short) pages of the tax return by completing box 10.1 to show the amount you are claiming.

If you claimed the SEISS grants during Covid 19 then you must complete a Self Assessment tax return, even if your self-employment income is covered by the trading allowance. You must include the amount of SEISS grant income you received as it is subject to Tax and National Insurance contributions. You should still keep records of your trading income and expenses so you can work out whether or not you are entitled to use the trading allowance, and if so, whether you want to do so.

What if I have trading income of more than £1,000?

If your total trading income in the tax year is more than £1,000 you can choose to deduct the trading allowance from the trading income. This is instead of deducting your actual business expenses for the period. If you do this, the taxable profit from the activity will simply be the total income less the trading allowance. For example, if Amelia has total income of £1,850 from selling home-baked cakes at local craft fairs in 2021/22, and she decides to claim the trading allowance, her taxable profit from this is £850.

It would be beneficial to claim the trading allowance in this way, known as partial relief, if the expenses related to the activity are low. It also means that you do not need to prepare any business accounts for tax purposes. For example, Adam runs a dog-walking business and made £1,400 during the tax year he has expenses of £150 then he claim the trading allowance of £1,000 instead of business expenses of £150 (he cannot claim both!) and his taxable income will only be £400 instead of £1,250. It is important to note that If you are claiming partial relief in this way then you will not be able to claim tax relief for any pre trading expenditure.

It will still be necessary to keep records of your income and expenditure as you will need to know what your trading income is and it is helpful to know what your business expenses are to be able to work out whether or not you wish to claim the trading allowance.

As your income is above the trading allowance HMRC say you must register your self-employment and complete a Self Assessment tax return. The trading allowance can be claimed when you complete your tax return you will find this on page 1, box 10.1 on the self-employment short pages of the tax return.

What happens if I have more than one source of trading, casual or miscellaneous income?

If you have more than one type of trading, casual or miscellaneous income you can still only claim one trading allowance but you can choose how to allocate the allowance between your income sources.

Why might I not want to claim the trading allowance?

Initially it looks like there should be no reason not to use the trading allowance, however, it may not be beneficial for you to claim this in certain circumstances. These include:

  • You have business expenses greater than £1,000. In this case you should use your actual expenses as this way you'll pay less tax!

  • You have made a trading loss. If this is the case it will be beneficial to complete a Self Assessment tax return and make a claim for the losses rather than use the trading allowance which cannot be used to make a loss.

I hope you have found this blog helpful. There is further information available at www.GOV.UK.

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