The Blog from CheapAccounting.co.uk and TaxBootCamp.co.uk

Tax Tips and Advice for Freelancers and the Self Employed

What you need to know about the Trading Allowance for the self employed

by CheapAccounting.co.uk and TaxBootCamp.co.uk Leave a Comment

 

With the intention of making life simpler for the self employed (those operating their own business as a sole trader) the Trading Allowance was implemented in April 2017.

What is the Trading Allowance?

The Trading Allowance is a form of Tax Relief. Whilst introduced with the intention of making life simpler for small earners, any relief brings with it the added burden of ensuring that you comply with the rules of the relief as well as the necessary record keeping to prove it!

When would you use the Trading Allowance?

If your annual gross income is £1,000 or less from your self employed activities then you may not need to tell HMRC about the income or complete a self assessment tax return. This is known as full relief.

Equally if your income is over the Trading Allowance but costs are less than £1,000 then instead of claiming for all of your costs you can make, what is known as a partial relief, claim of £1,000 but this must not exceed your total income.

Who can use the Trading Allowance

The Trading Allowance is for individuals with income from:

  • self-employment
  • casual services or miscellaneous income from casual earnings (e.g. babysitting, gardening services etc), commission and freelance income
  • hiring personal equipment, for example, power tools

Record keeping for the Trading Allowance

If you want to claim the Trading Allowance because your income is less than £1,000 then HMRC state that you must keep records of your income.

However on a practical level it would also make sense to keep a record of your costs so that you can determine if it is worth claiming the Trading Allowance and avoiding registering with HMRC or registering for the self assessment to record a loss.

Losses

In the early days of starting a business, whether with the intention of this being your full time activity or you’re starting up a Side Hustle, you may make a loss.

Losses are not always bad, as long as they are planned, expected, containable and not a downward trend.

Importantly losses can be offset against other income or, when starting out, carried forward to offset against future profits from your business. Full rules on loss relief can be found on the GOV.uk web site – click here

Practical Advice on when to use the Trading Allowance

Use the Trading Allowance if:

  • you’ve a very small amount of income
  • little in the way of costs
  • do not create a loss
  • have little intention of making this activity your main source of income

When to avoid using the Trading Allowance

There may be valid reasons why the Trading Allowance will not meet your needs and the use of it should be avoided. These include if you:

  • make a loss as you may want to carry this forward against future profits or even offset it against other income such as that from your main job if you’re operating a side hustle
  • want to make voluntary Class 2 National Insurance contributions (the National Insurance paid by the self employed) so that you qualify for some benefits
  • want to use your self employed income to claim Tax Free Childcare or the Maternity Allowance
  • are a subcontractor and want to claim tax that has been deducted under the Construction Industry Scheme (CIS)

Filed Under: 1. About Accounts and Tax

Leave a Reply Cancel reply

You must be logged in to post a comment.

Copyright

The copyright of these blogs belongs to Elaine Clark of CheapAccounting.co.uk and MUST NOT be reproduced without her express permission.

We are seeing numerous copies of our blogs appearing on the web sites and blogs. We’re afraid that it is now time for me to take a tough stance on breaches of my copyright!

Any breaches of copyright will result in a charge to the copier of £5,000, payable immediately for use of our content.


Recent Posts

  • Salary and Dividends for 2022 / 2023
  • Lost Accounting Data – Emergency Plan for Limited Company Contractors
  • Self Assessment Q&A
  • What Dividends do you put on your Self Assessment?
  • 10 things you should know about payments on account if you’re self-employed

Contact

Email admin@CheapAccounting.co.uk

Phone 0203 916 5595

Copyright © 2022 · Magazine Pro Theme on Genesis Framework · WordPress · Log in