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Trading Allowance: what it is and how to make it work for you

January 3, 2023
When starting a small business, it can take some time to get things off the ground. As a result, you might find yourself making a loss in your first year of trading, or only a relatively small profit.In either situation, you might be wondering how this affects the tax you pay as a newly self-employed person, or if you even need to file a tax return in the first place.Here’s where the trading allowance, or trading income allowance, comes in. In this guide, we’ll be outlining what the trading allowance is, who’s eligible to claim and whether you need to file a tax return.

What is the Trading Allowance?

The trading allowance is a tax relief of up to £1,000 available to individuals with trading income from self-employment, casual services or personal equipment hire.As the trading allowance is a tax-free allowance, you won’t need to declare your income to HM Revenue and Customs (HMRC) if you’re earning less than £1,000 in a tax year.
This also means that if you’re in your first year of trading and earn less than this amount, you won’t need to register for Self Assessment (yet). It is advised, however, that you keep ahold of any business records generated in this time, just in case HMRC asks in future. If you’re looking for a free accounting software to store your business records while you’re getting started, look no further than Ember.

Trading Allowance as a tax-free allowance

Depending on your total business income or expenses, you might find claiming your trading allowance proves to be more tax efficient than claiming for business expenses.If your expenses are above £1,000, you can use the trading allowance instead of business expenses to claim ‘partial relief’ on your Income Tax bill.For instance, if you have a profit of £5,000 and £500 in expenses, you can use your trading allowance to lower your taxable profit to £4,000, instead of claiming for business expenses, which would only reduce your taxable profit to £4,500.It’s worth noting that you can’t use the trading allowance to generate a tax loss. For instance, if you made £800 in a tax year, you’d be able to claim the full amount, known as ‘full relief’, but wouldn’t be able to carry the remaining £200 over into the next tax year.

Who can claim the Trading Allowance?

You can claim the trading allowance if you have trading income from:
    Self-employment as a sole trader Construction workers claiming the CIS tax rebate Casual services, such as babysitting or gardening Hiring personal equipment, such as power tools
It’s also worth noting who can’t claim the trading allowance. While sole traders are eligible, limited companies and partnerships cannot claim the trading allowance.Landlords aren’t eligible to claim the trading allowance, yet they can claim up to £1,000 against their property income using the property allowance. This means that if you’re generating both self-employment and rental income, you’ll be able to claim £1,000 against each.

How can I claim the Trading Allowance?

If you’re earning above £1,000 in trading income, you’ll be able to claim your trading allowance through your Self Assessment tax return. You’ll be able to do this by ticking the trading allowance box on your Self Assessment.

If you’re new to business, you’ll need to register for Self Assessment as soon as you pass this threshold, and will need to file a tax return by 31st January annually. If your taxable income is below £1,000, you won’t need to register, as your trading allowance will automatically be applied.
Even if your self-employment income is below £1,000, however, you might still need to register for Self Assessment if your employment income above £100,000, want to pay Class 2 National Insurance contributions, or if you want to claim certain benefits, such as Tax Free Childcare or Maternity Allowance.

Do I always need to file a Self Assessment to claim my Trading Allowance?

If your income from self-employment is less than £1,000, and you have no other reason to file a tax return, you won’t need to file a Self Assessment to claim your Trading Allowance.