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:
- 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.
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)