What is the trading allowance?
The trading allowance lets you earn up to £1,000 from self-employment without paying tax on it or registering for Self Assessment. Here's how it works and when it applies.
7/8/20262 min read
What is the trading allowance?
The trading allowance is a £1,000 annual tax exemption for self-employment income. If your total gross trading income in a tax year is £1,000 or less, you don't need to pay any tax on it, register for Self Assessment, or file a return.
It's designed to keep things simple for people with small amounts of self-employment income - a side project, occasional freelance work, or casual earnings from selling things online.
The key detail: it's based on gross income, not profit
The £1,000 threshold applies to your total income before any expenses, not your profit after costs. So if you earn £900 selling handmade products and spend £600 on materials, your income is £900 - you're under the threshold and the trading allowance covers it.
But if you earn £1,100 and spend £600, your gross income is £1,100. You've crossed the threshold and need to register for Self Assessment, even though your profit is only £500.
What happens if you earn more than £1,000?
If your gross trading income exceeds £1,000, you need to register for Self Assessment and file a return. However, you still get to use the allowance in one of two ways:
• Claim the £1,000 trading allowance as a deduction instead of your actual expenses - useful if your real expenses are low
• Claim your actual business expenses instead - useful if your expenses exceed £1,000
You can't use both methods at once - it's one or the other for the tax year. Choose whichever gives you the lower taxable profit.
For example: if you earn £2,500 and your expenses are £400, claiming the trading allowance gives you a taxable profit of £1,500. Claiming actual expenses gives you £2,100. The trading allowance wins here.
If your expenses are £1,800, actual expenses give you £700 taxable profit. The trading allowance gives £1,500. Actual expenses win.
The £1,000 limit covers all your trading income combined
If you have multiple sources of self-employment income - say, some freelance design work and occasional income from selling online - the £1,000 allowance covers all of it combined. You don't get a separate £1,000 for each activity.
When the trading allowance doesn't apply
The trading allowance doesn't apply to income from a partnership, or to income paid to you by a business that you or a connected person controls. It also can't be used alongside other property or trading relief in the same tax year in some circumstances - if in doubt, check the HMRC guidance or speak to an accountant.
A change coming in 2027
The government has confirmed it will raise the Self Assessment registration threshold for trading income from £1,000 to £3,000, expected from the 2027/28 tax year. The trading allowance itself stays at £1,000 - so you'll still get £1,000 of tax-free income. The change just means that people with income between £1,000 and £3,000 will use a simplified reporting system rather than a full Self Assessment return.
Do you need to tell HMRC?
If your gross trading income is £1,000 or less and you have no other reason to file a Self Assessment return, you don't need to do anything. You don't need to notify HMRC or claim the allowance formally. Just keep a note of your income in case you're ever asked.
If you're not sure whether you need to register, our post on Do I need to register for Self Assessment? covers the full picture.
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