HMRC introduced two new annual tax allowances of £1,000 each in early 2018. There is a trading income allowance as well as an allowance for people who earn money from property investment. These exemptions also apply to other sources of income, such as selling small personal assets online and offering your services for a fee.
While the allowance itself is fairly straightforward, it does have its own set of consequences that need to be considered, to make sure not only that you are doing the right thing in the eyes of HMRC but also to ensure you make, rather than lose, money.
The Quick Explanation of the Trading Income Allowance
If you’re self-employed and have part-time or casual earnings on the side, the £1,000 tax-free allowance comes in handy. You could, for example, work part-time selling products on eBay. Or, in your spare time, you might work as a Deliveroo driver while also holding a regular job.
Whatever your side hustle, the self-employed allowance means you won’t have to declare or pay tax on trading income of less than £1,000 in a tax year. If you earn more than £1,000, on the other hand, you can choose whether to deduct the £1,000 allowance from your income or from your allowable expenses.
Practical Implications to Consider
There are some practical implications to the trading income allowance that you should be aware of. To begin, if your expenses total less than £1,000 during the tax year, you may be able to deduct the trading allowance. If your expenses total more than £1,000, however, deducting them will result in lower profits and a lower tax bill.
Your actual income is the second practical implication. If your trading income is less than £1,000, but you lose money, you can choose not to use the allowance at all. You – or your accountant – can calculate the loss in the same way in this case, and these details will be included in your individual tax return. This also means you aren’t squandering your loss relief.
Let’s say you sell clothes to your friends and family, as well as on eBay and other websites on occasion. You earn £700 during the tax year, but your expenses total £100. You won’t have to report your earnings to HMRC because they were less than £1,000, and you won’t have to pay any National Insurance contributions or tax on them. If you earn £1,900 in a tax year and have £300 in expenses, your profits will be £900, or £1,900 minus the £1,000 trading allowance.
What if You Have Several Trade Sidelines?
If your primary source of income is self-employment and your secondary source of income is a different small business, you must exercise extreme caution when it comes to the trading income allowance. This is because when calculating your allowance, all of your earnings from trading and other side hustles will be added together.
If you claim your allowance in this case, you won’t be able to claim any expenses, regardless of how many businesses you run or how much money you make.
Let’s say you’re a self-employed translator with a yearly income of £20,000 and $5,000 in expenses. You also make £1,500 a year selling clothes on the side. You won’t be able to claim your £5,000 in expenses if you choose to claim your trading allowance against your part-time clothes selling job, so your taxable profit will be the full £20,000. Your taxable profit will be £15,500 if you do not claim your trading income allowance.
Finally, if you have both casual and property income, you can use both the trading and property allowances, leaving you with a £2,000 allowance each year.
Get Professional Help to Maximize Trading Allowance Benefits
Claiming the trading income allowance can be a great way to earn more money while paying less tax, and doing so legally. However, if you don’t understand the rules and claim the deduction on the wrong earnings, you may end up paying more tax in the long run. While filing a tax return for income covered by the property or trading allowance isn’t required, you should do so if you want to pay Class 2 NICs to qualify for the state retirement pension or claim loss relief when your expenses exceed your receipts.
Like so many things relating to UK income and taxes, an accountant can be a big help to ensure that you do the right thing for yourself, your bank balance and by HMRC. Whatever your personal or business accounting needs, Pearl Lemon Accountants can help. Contact us today to chat about just how we can help you.
FAQs
What is trading income allowance?
A trading income allowance is an allowance that can be utilised to trade casual and/or miscellaneous types of income.
Can I claim a £1000 trading allowance?
Yes, but only if the gross trading income for the tax year is either £1000 or less.
What happens if I have more than one source of trading?
You can choose where to award the allowance among your various income sources. However, you’d only be able to claim a single trading allowance.
Why might I not want to claim the trading allowance?
There are certain situations in which it wouldn’t be beneficial for you to claim the trading allowance, including:
- First, if you currently have business expenses larger than £1,000.
- Second, if your expenses exceed your income.
- Third, if you have multiple types of casual income or various trading businesses.
If you want more specific information, feel free to book a call with our experts!
How does the trading allowance work with tax credits and universal credit?
With tax credits, the information you provide to HMRC regarding your income is usually similar to the figures detailed on the Self Assessment tax return. This means that the income needed to determine the amount of the tax credits is the one including any trading allowance deductions.
With universal credit, the trading allowance is disregarded when your universal credit claim is being determined.
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Where can I find more information on the trading allowance?
You can find more information on trading allowances by booking a call with our experts. They are more than willing to answer all your questions and provide guidance on this matter.
You can also find additional information in the Business Income Manual provided by HMRC on the GOV.UK website.
