The £1,000 Trading Allowance: When to Use It
The trading allowance lets you earn up to £1,000 a tax year from self-employment or side income without paying tax on it. Above that, it can still reduce your taxable profit, but it is not always the best choice. This guide explains how the allowance works, when it beats claiming expenses and when it does not. It is general information, not tax advice, and the rules can change, so check GOV.UK or an accountant before you decide.
Key takeaways
- The trading allowance covers up to £1,000 of trading income each tax year.
- If your gross trading income is £1,000 or less, you get full relief and may not need to tell HMRC, though there are exceptions.
- Above £1,000, you can deduct the allowance instead of actual expenses (partial relief), but you cannot claim both.
- If your expenses are more than £1,000, claiming them is usually better.
- There is a separate £1,000 property allowance for property income.
Lots of people earn a little money outside a job: selling handmade items, tutoring, pet sitting, a few design commissions or occasional consulting. Before the trading allowance, even very small amounts could mean dealing with Self Assessment. The allowance was introduced to make life simpler for people with small amounts of side income.
For anyone earning more than £1,000, the allowance becomes a choice rather than an automatic exemption. Knowing how to make that choice can save you tax, or save you time.
What the trading allowance is
The trading allowance is a tax-free allowance of up to £1,000 a tax year for income from trading, casual services or hiring out personal equipment. The UK tax year runs from 6 April to 5 April, so it applies separately to each year, including the current one from 6 April 2026 to 5 April 2027.
It works on gross trading income, meaning what you receive before taking off any costs. This is an important detail. If you earn £1,200 and spend £300 on materials, your gross income is £1,200, so you are above the full relief level even though your profit is only £900.
Full relief: income of £1,000 or less
If your gross trading income in a tax year is £1,000 or less, you get full relief. In many cases that means you do not need to register for Self Assessment or declare the income to HMRC.
There are exceptions, so check GOV.UK if any of these might apply:
- You are already in Self Assessment for another reason, in which case you may still need to report the income.
- You want to make a loss claim or protect your National Insurance record, which may be better done by registering.
- The income comes from a partnership, or from a business connected to you, such as your employer or a close relative's company.
Common mistake
Assuming the £1,000 limit applies to each side hustle separately. The allowance covers your total trading income for the year. If you sell crafts and also do some freelance editing, add both together to see whether you are over £1,000.
Partial relief: income above £1,000
Once your gross trading income goes over £1,000, you need to register for Self Assessment by 5 October after the end of the tax year in which you started, and report the income. When you file, you choose one of two methods to work out your taxable profit:
- Deduct your actual allowable expenses. Income minus the real costs of running the business.
- Deduct the £1,000 trading allowance instead. This is partial relief: income minus £1,000, with no expenses claimed.
You cannot use both. If you take the allowance, you cannot also deduct any expenses for that trade in that year.
Example
Imagine three people with made-up figures for one tax year:
- Amira tutors online and earns £3,000 with only £200 of costs. Using expenses, her profit is £2,800. Using the trading allowance, it is £2,000. The allowance gives her the lower taxable profit.
- Ben sells illustrations and earns £3,000, but spends £1,400 on software, a tablet and printing. Using expenses, his profit is £1,600. Using the allowance, it is £2,000. Claiming expenses is better.
- Chloe walks dogs and earns £900 in the year. She is under £1,000, so she gets full relief and, unless an exception applies, does not need to report it.
These are simplified examples that only compare taxable profit. Actual tax depends on your other income and your circumstances.
How to choose between the allowance and expenses
The decision is mostly arithmetic, but a few practical points matter too.
When the trading allowance usually wins
- Your allowable expenses for the year are well below £1,000.
- Your side income is a service with very few costs, such as tutoring, consulting or pet sitting.
- You want simpler records for that trade, since you are not claiming expenses.
When claiming expenses usually wins
- Your expenses are more than £1,000.
- You bought equipment, stock or materials in the year.
- You made a loss and may want to use it, which the allowance does not allow.
Pro tip
Keep receipts and records even if you plan to use the allowance. You can only make a fair comparison at the end of the year if you know what your real expenses were, and you still need accurate income records to report to HMRC.
You can make the choice each tax year. A year with heavy equipment spending might suit claiming expenses, and a quieter year might suit the allowance. Look at the numbers again each time you file.
The trading allowance and the property allowance
There is a separate £1,000 property allowance for property income, such as renting out a driveway or occasionally letting a room in a way that is not covered by other reliefs. It works in a similar way to the trading allowance but covers a different type of income.
The two are separate, so having trading income does not reduce your property allowance and vice versa. Each has its own rules and exceptions, so check GOV.UK for the details that apply to your situation.
Common situations and how the allowance applies
| Situation | Likely approach |
|---|---|
| Selling unwanted personal items occasionally | Usually not trading at all, so the allowance may not be relevant |
| Small side income of £1,000 or less, few costs | Full relief; you may not need to tell HMRC |
| Side income above £1,000, low costs | Register for Self Assessment and consider the allowance |
| Side income above £1,000, high costs | Register and claim actual allowable expenses |
| Full-time sole trader with regular costs | Usually claim actual expenses |
Selling personal possessions is generally different from trading, but if you buy items to sell on at a profit, or make things to sell, HMRC may see that as a trade. If you are unsure, use HMRC's guidance on whether you are trading or ask an accountant.
Common mistake
Forgetting that online platforms may share information about sellers with HMRC. Do not assume small side income goes unnoticed. Know which side of the £1,000 line you are on, and register in time if you are over it.
Records to keep, even under the allowance
The trading allowance simplifies your tax, but it does not remove the need for basic records. HMRC can still ask how you know your income was under £1,000, or how you arrived at the figure on your return. A light system is enough:
- Log every sale or payment. Date, customer or platform and amount. Platform reports and bank statements can do most of the work.
- Keep a running total. Check it every month or so, so you know early if you are heading over £1,000.
- Keep receipts for costs. You need them to compare expenses with the allowance at the end of the year.
- Note your decision. Record which method you used for each tax year and why.
If your side income is growing, it may be worth moving it into a separate bank account. Sole traders are not legally required to have a business account, but keeping side income apart from your salary and personal spending makes the totals far easier to check. Once your income is regularly well above £1,000, the bookkeeping habits of a full sole trader start to pay off.
Your trading allowance checklist
- Add up your total gross trading income for the tax year from all side activities
- If it is £1,000 or less, check whether any exceptions require you to report it
- If it is over £1,000, register for Self Assessment by 5 October after the tax year
- Total your allowable expenses and compare them with £1,000
- Choose the method that gives the lower taxable profit, unless you have a reason to claim a loss
- Keep income and expense records whichever method you use
Frequently asked questions
Is the £1,000 based on income or profit?
It is based on gross trading income, before expenses. If you earn £1,100 and spend £400 on costs, you are above the £1,000 full relief level, even though your profit is lower.
Can I use the trading allowance if I also have a job?
Yes. The allowance is available whether or not you have a job. Your employment income is taxed through PAYE, and the trading allowance applies to your separate trading income.
Can I claim the trading allowance and some expenses?
No. For a given trade in a given tax year, you either deduct the £1,000 allowance or your actual allowable expenses. You cannot combine them.
What if I go over £1,000 late in the tax year?
You need to register for Self Assessment by 5 October after the end of that tax year. Registering late and not paying by 31 January can lead to a failure to notify penalty, so register as soon as you know you are over.
Related reading
The bottom line
The trading allowance is a simple, useful tool. Under £1,000 of gross trading income, it can keep you out of Self Assessment altogether. Above that, it is an option, not an automatic win: compare it with your real expenses each year and use whichever gives the lower taxable profit.
Allowances and rules can change. This is general information, not tax advice, so check the current guidance from HMRC on GOV.UK, or talk to an accountant if your situation is not straightforward.
