Trading Income Allowance

Trading Income Allowance – A Small Guide for Beginners

If you’re a newly self-employed person looking to set up a business, then you may be concerned about the taxes. But first, you must be aware of a tax relief that is available for you. This tax relief is known as a trading income allowance. It has an impact on the tax amount, which you are required to pay.
Keep on reading this blog to know more about trading allowance.


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What is a Trading Income Allowance?

To provide additional tax relief to self-employed persons, the trading allowance was first introduced in 2017. As a result, you don’t have to register for Self Assessment with HM Revenue & Customs or pay tax on your business income if you are a self-employed person with an income less than £1,000 per year (from your employer).

But you’ll have to register with HM Revenue & Customs if your income exceeds the threshold of £1,000 in a tax year.


What are the Ways to Claim the Trading Income Allowance?

If the trading revenue of a self-employed person for a tax year is equal to or less than £1,000, then the trading allowance will cover the whole amount of this income, known as “Full Relief.”

Before deducting any expenditures, if the trading revenue of a self-employed person for a tax year is more than £1,000, then, in this case, you can choose one option from the following.

  • Against the total income, claim the trading allowance. No other deductions or expenditures are allowed under this option, or.
  • Do not claim the trading allowance and instead claim their actual expenditures against the total income (normally deduction of the allowed expenses from the total income).



In a tax year, you can not claim the allowances if you have a property income or any trade from:

Claim the Trading Income Allowance


Is the Trading Allowance more Tax-Efficient than Claiming Expenditures?

It is more tax-efficient to claim for the expenditures if they exceed the £1,000 trading allowance. And if the total amount of your expenditures is less than the £1,000 trading allowance, in this case, claiming your trading allowance saves you more money on taxes instead of your expenditures.


Is the Trading Allowance Calculated Based on Profit or Income?

Before subtracting the tax and expenditures, the trading allowance applies to your total income. For instance, suppose you earn £2,000 in a tax year from your business. Then, even if you have expenditures of £800, which bring your profit to £1200, you must register with HM Revenue & Customs and file a Self Assessment tax return.



We hope this blog helps you to understand this term better. You will need to register to HMRC if your total income exceeds £1,000 a year. After that, each year, you are also required to file a Self Assessment tax return. Therefore, we recommend you consult with an accountant before claiming a trading allowance, as the rules are complex.


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Disclaimer: This blog contains general information about trading income allowance.

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