Sarah Laing looks at how the trading tax allowance can be used to give ‘hobby-style’ traders some tax-free income.
HMRC introduced two new allowances with effect from 2017-18 onwards; the trading allowance and the property allowance. The allowances are currently worth £1,000 each, for each tax year, and in broad terms mean that those with income from these sources below the annual threshold may not need to report it to HMRC.
Trading allowance
The trading allowance may be particularly useful for people with casual or small part-time earnings from self-employment, for example, someone working in the ‘gig economy’ (Deliveroo workers and such like), or small-scale self-employment such as online selling (maybe via eBay or similar). It means that:
- individuals with trading income of £1,000 or less in a tax year will not need to declare or pay tax on that income; and
- individuals with trading income of more than £1,000 can elect to calculate their profits by deducting the allowance from their income, instead of the actual allowable expenses.
Points to note
Practical implications of the allowance include:
- where actual expenses are less than £1,000, deducting the trading allowance will be beneficial, whereas if actual expenses are more than £1,000, deducting the actual expenses will give a lower profit figure, and ultimately a lower tax bill.
- where income is less than £1,000, but the individual makes a loss, an election for the allowance not to apply may be made. In this case, the loss is calculated in the usual way and the details included on the individual’s tax return. This, in turn, means that loss relief is not wasted.
Example 1: Income less than £1,000
Peter makes ceramic pots in his spare time, which he sells to friends and family and occasionally at local fairs. His income from the sale of his pots for 2018/19 is £900, and his expenditure is £200.
As Peter’s trading income is less than £1,000, he does not need to report it to HMRC and he does not need to pay tax or National Insurance contributions (NICs) on it.
Example 2: Income exceeding £1,000
Terry collects old football magazines and he regularly sells duplicate or unwanted items via an online member’s forum. In 2018/19, his income from sales is £1,800 and he incurred expenses of £300.
As Terry’s expenditure is less than £1,000, he will be better off if he claims the trading allowance. His taxable profit will be £800 (£1,800 less the trading allowance of £1,000).
Multiple trading sources
The trading allowance may work well for many small-scale traders, but care must be taken where an individual’s main source of income is from self-employment and their secondary income is from a completely separate small business.
Income from all trading and casual activities will be combined when considering the trading allowance. If the allowance is claimed in this situation, the individual will not be allowed to claim for any expenditure, regardless of how many businesses they have and how much their total business expenses are.
Example 3: Income from two sources
Mary is a self-employed dressmaker and has income of £30,000 in 2018/19. Her expenditure for the year is £10,000. She also has casual income from a separate part-time role of £1,000 for the year.
If Mary claims the trading allowance against her part-time income, she will be unable to claim expenses of £10,000 against her dressmaking income, and her taxable profit for the year will be £30,000. If she doesn’t claim the trading allowance, her taxable profit for the year will be £21,000.
Finally, it is worth nothing that an individual with casual income or income from a small business and also property income can make use of both the trading and property allowances of £1,000 each per tax year.
Practical Tip:
Although it will not normally be necessary for those whose only income is covered by the trading and/or property allowances to submit a tax return, there are certain situations in which it may be advisable to do so - for example, those who want to pay Class 2 NICs to build up entitlement to benefits such as the state retirement pension, or those who wish to claim loss relief because their trading expenses exceed their receipts.
