What is the trading allowance and how does it work?

Full answer

The trading allowance is designed to keep small-scale, casual earners out of the tax system entirely, recognising that many people have modest side income that would create disproportionate admin burden if taxed and reported in the normal way. **How the £1,000 threshold works** If your total gross income from self-employment or miscellaneous trading activities is £1,000 or less in a tax year, you do not need to tell HMRC about it, register for Self Assessment, or pay any tax on it -- this applies per person, not per source, so it covers the combined total from all your casual trading activities, not £1,000 per separate side hustle. **What counts as trading income** This covers things like selling handmade goods online, occasional freelance work, dog walking, tutoring, or similar small-scale self-employed activities -- it does NOT cover employment income (which is taxed via PAYE regardless of amount) or rental income (which has its own separate £1,000 property income allowance). **If you earn over £1,000** Once your gross trading income exceeds £1,000, you must register for Self Assessment and report the income, but you still have a choice: deduct the £1,000 trading allowance from your income (simple, no need to track actual expenses), OR deduct your actual allowable business expenses if they exceed £1,000 -- you cannot do both, so if your genuine expenses (materials, tools, mileage, etc.) are below £1,000, the flat allowance is usually more generous. **Worked example** Someone earns £2,400 in a year from selling crafts online, with £600 of actual materials and postage costs. They could deduct the £1,000 trading allowance (leaving £1,400 taxable) rather than their £600 actual expenses (which would leave £1,800 taxable) -- the flat allowance saves them £400 of taxable profit in this case. **Combining with employment** If you also have a full-time job, the trading allowance still applies separately to your side income -- your employment income is taxed via PAYE as normal, and your trading income (after deducting the allowance or expenses) is added on top and taxed through Self Assessment. **Practical tip** Keep basic records of your side income even if you expect to stay under £1,000, since gross income (before any costs) is what counts toward the threshold -- if you are close to the limit, a small increase in sales could tip you into needing to register, so it is worth tracking through the year rather than discovering a surprise obligation at year end.

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