Self Assessment

Use the trading allowance

When to use the £1,000 trading allowance versus claiming actual expenses. Includes eligibility rules, relief types, and the interaction with property allowance.

UK-wide
Guide summary

Decide whether to use the £1,000 trading allowance or claim actual expenses for your self-employment or casual work income. You cannot do both. If your income is £1,000 or less, you do not need to report it to HMRC or pay tax.

  • Choose between the £1,000 allowance or claiming actual expenses
  • Use allowance if expenses are under £1,000 or income is £1,000 or less
  • Claim expenses if they exceed £1,000 or you want to claim a loss
  • Cannot claim both allowance and expenses in same tax year
  • Excluded income (employer, partnership) disqualifies all trading income
  • Cannot create a loss with allowance (limited to actual income)
  • Separate £1,000 property allowance available if you have rental income
  • No Self Assessment needed if trading income under £1,000
  • Deadline to elect partial relief: first anniversary of 31 January
  • Cannot claim capital allowances if using trading allowance
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UK-wide Sole Trader

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The trading allowance lets you earn up to £1,000 from self-employment or casual work without paying tax on it. But you need to decide whether to use this allowance or claim your actual expenses instead - you cannot do both.

What is the trading allowance?

The trading allowance is a £1,000 tax-free allowance for individuals with trading or miscellaneous income. It was introduced in April 2017 to simplify tax for people with small amounts of self-employment income.

Who can claim it?

The trading allowance is available to individuals only. You can claim it on income from self-employment, casual work, or miscellaneous sources like hiring out personal equipment. However, there are important restrictions.

Allowance or expenses - how to decide

This is the key decision. You must choose one method only for each tax year - you cannot claim the allowance and also deduct actual expenses.

Use the trading allowance when:

  • Your actual business expenses are less than £1,000
  • You want to keep things simple with minimal record-keeping
  • Your gross income is £1,000 or less (you pay no tax either way)

Claim actual expenses when:

  • Your expenses exceed £1,000
  • You want to claim a trading loss (allowance cannot create a loss)
  • You have significant capital allowances to claim
  • Your business has substantial costs (stock, equipment, premises)

Example decision:

  • Sarah earns £3,000 from freelance writing with £400 in expenses. Using the allowance gives her £2,000 taxable profit. Claiming expenses gives her £2,600 taxable profit. The allowance wins.
  • Tom earns £3,000 from car boot sales with £1,500 in stock costs. Claiming expenses gives him £1,500 taxable profit. The allowance would give him £2,000 taxable. Expenses win.

Important restrictions

Before you decide to use the trading allowance, check these restrictions carefully.

Property allowance - a separate £1,000

If you have property income as well as trading income, there is good news. The property allowance is completely separate from the trading allowance.

Practical example

  • You earn £800 from occasional freelance work (trading income)
  • You earn £600 from renting out your parking space (property income)
  • Both are under £1,000, so you can use both allowances
  • Result - no tax to pay, no need to register for Self Assessment

When you do not need to register for Self Assessment

If your total trading income is £1,000 or less, you do not need to register for Self Assessment or tell HMRC about this income. The allowance automatically applies.

If you already file a Self Assessment return for other reasons (employment over £100,000, rental income, etc.), you can still use the trading allowance - just do not include the trading income if it is under £1,000, or elect partial relief if it exceeds £1,000.

National Insurance implications

If you use the trading allowance and your profits are reduced to nil, you will not owe Class 2 National Insurance. However, this could affect your state pension entitlement. You may want to pay voluntary Class 2 contributions (£3.50 per week in 2026/27) to protect your NI record.

Common mistakes to avoid

  • Claiming both - You cannot use the allowance and claim expenses in the same tax year
  • Ignoring restrictions - Any excluded income (from employer, spouse's employer, or connected partnership) disqualifies all your trading income from the allowance
  • Forgetting capital allowances - If you use the trading allowance, you cannot claim capital allowances that year
  • Multiple trades - The £1,000 allowance is shared across all your trades and miscellaneous income - not £1,000 per trade
  1. 1

    Calculate your gross trading income

    Add up all income from self-employment and miscellaneous sources before any expenses.

  2. 2

    Calculate your actual expenses

    Work out what you could deduct if claiming expenses - include allowable business costs and capital allowances.

  3. 3

    Compare the two methods

    If expenses are less than £1,000, the allowance is better. If expenses exceed £1,000, claim them instead.

  4. 4

    Check for excluded income

    If you receive any income from an employer, spouse's employer, or connected partnership, you cannot use the allowance at all.

  5. 5

    Decide on National Insurance

    If using the allowance reduces profits to nil, consider voluntary Class 2 NI to protect your state pension.

  6. 6

    Apply the right relief

    Under £1,000 = full relief (no return needed). Over £1,000 = elect partial relief when filing your return.

Tax-free allowances on property and trading income (opens in a new tab)
TURNOVER £1,000

No registration required

If your total self-employment income is £1,000 or less, you do not need to register for Self Assessment or report this income to HMRC.

Above threshold:

You must register for Self Assessment. You can then choose to use the trading allowance (reducing taxable profit by £1,000) or claim actual expenses.

Below threshold:

The trading allowance automatically covers your income. You have no tax to pay and no filing requirements for this income.

Strategic considerations: Even below £1,000, you might want to register if you need to prove self-employment for mortgages, Universal Credit, or if you want to pay voluntary Class 2 NI for State Pension credits.
Trading allowance (GOV.UK) (opens in a new tab)
SOLE TRADER Advantage

Trading allowance simplifies small-scale self-employment

The trading allowance is designed for sole traders with small amounts of self-employment income. It offers:

  • No registration needed if income is under £1,000
  • Simplified record-keeping - no need to track every receipt
  • Flat deduction of £1,000 from income over £1,000

Comparison to other structures:

Limited companies cannot use the trading allowance. All company income and expenses must be properly recorded and reported through Corporation Tax returns.

When this matters: The allowance is ideal for casual freelancing, gig economy work, or testing a business idea before fully committing to self-employment.
Trading allowance (GOV.UK) (opens in a new tab)