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.
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.
Got questions? Ask Emily!
FreeAgent's Chief Accountant Emily Coltman is available to answer your questions in the comments.