The Self Employed £1000 Trading Allowance Explained

Kirsty Young Freelancers, Tax

We quite often see self-employed business owners paying tax where they don’t need to. This is almost always down to a lack of knowledge.

The £1000 Trading Allowance is one of those reliefs that owners often overlook.

One example of where the £1k trading allowance applies is when someone is in full time employment, and also has a small side business. In this situation, having knowledge of the ‘Trading Allowance’ can make a big difference. (There are other situations, but this is one of the most common.)


How does the £1K tax allowance work?

You can use this trading allowance against your self-employed income, such as your side business / side hustle income.

What you’ve taken in / sold in your side business is classed as self-employment income. If your self-employment income isn’t more than £1000, you effectively don’t need to pay tax on it as you reduce your taxable profits to zero.

This may mean you then don’t need to register for a tax return, unless you have other reasons to need one. (There are some cases where you might want to submit a tax return anyway, but that’s for another blog!)

If you do have self-employed income of more than £1000 within your tax year, then you have to register for a tax return in the normal way asap. (See more on this in our Start Up Guide).


Self-employed income and your tax return

You have two options when it comes to completing your tax return.


1. You use the Trading Allowance

If you choose to use the Trading Allowance, you deduct up to £1000 from your income. This cannot create a tax loss, i.e. you can’t deduct £1000 from an £800 income and create a -£200 figure, looking for a tax refund, for example.

You get the full £1000 allowance even if you only traded for part of the tax year.

It doesn’t matter if you’ve not actually spent this amount on business expenses. However, if you do this, you cannot deduct any of your normal expenses – this £1000 replaces them.

This is a pretty good relief, but there are a few situations where you might not want to do this. For example, you may have lots of ‘pre trade’ expenses , i.e. costs you have before you started your business.


2. You use the normal rules

Alternatively, you can deduct all of your actual (allowable) expenses to come off your profit, which forms taxable income.

This method can create a tax loss, so you might choose this method if your expenses are higher than your income.

TRAP! if you have multiple self-employed trades, and you elect to use the trading allowance on just one of them, this means you can’t deduct your normal costs on ANY of your self -employed businesses.

Whether you use the allowance or not, you still need to keep full records of your ‘ins and outs’ (income and expenditure).


Is the £1000 just for self-employment?

You also get a separate £1000 for property income which works in a very similar way, but again, that’s for another blog!

As a side note, it sadly doesn’t work if you are in a partnership or a limited company.

For further discussion on this topic, check out our video on the trading allowance:


I’m still confused about the trading allowance!

If you don’t have an accountant, or feel you aren’t making the most of allowances for your self-employment income with your current accountant, we’d love a chat about how we can help.