The £1,000 Trading Allowance: When a Side Income Becomes HMRC's Business

A thousand pounds of gross income is the line. Below it, nothing to do. Above it, a return — and the choice between the allowance and your real expenses.

Almost everybody has heard there is a threshold before a side income becomes taxable. Fewer people know it is measured on the money coming in rather than what you keep, which is where the trouble starts.

What it is

The trading allowance exempts the first £1,000 of gross trading income in a tax year. Under that, there is generally nothing to report and no return to file.

Gross is the critical word. It is your income before expenses. Someone who sells £1,400 of handmade goods having spent £900 on materials has made £500 of profit and is over the threshold, because the test looked at the £1,400.

Over the line

Once gross trading income exceeds £1,000 you must register for Self Assessment and file a return. That obligation exists even where the profit is negligible or a loss. The deadline to register is 5 October following the end of the tax year concerned.

Filing does not necessarily mean paying. With a personal allowance of £12,570 there is often no tax at all on a modest side income. The requirement is to report, and the penalty for not reporting applies whether or not tax was due.

Allowance or expenses

Above the threshold you get a choice, and it is genuinely a choice — one or the other, not both:

• Claim the £1,000 allowance and deduct nothing else
• Claim your actual expenses and forgo the allowance

The arithmetic is simple: use whichever is larger. On £3,000 of income with £400 of costs, the allowance leaves you taxed on £2,000 rather than £2,600. On the same income with £1,800 of costs, claiming expenses leaves £1,200. You can decide differently each year as the figures change.

One consequence worth knowing: claiming the allowance means you cannot create or use a loss on that income. If your side business is genuinely losing money in its early years, claiming real expenses may be worth more than the allowance despite the smaller deduction.

Selling online

Selling your own used possessions is not trading and is not caught. Buying to resell, making to sell, or selling regularly at scale is. Digital platforms now report seller information to HMRC routinely, so the sensible working assumption is that the activity is already visible and the question is simply whether it has been declared.

The property allowance

A separate £1,000 allowance applies to property income, and it does not share a limit with the trading one. Somebody with a small trade and a modest amount of rental income can use both in the same year — though each is still an alternative to claiming real expenses on that income.

Getting help with this

AJH Accountants handles self assessment for clients across the UK. We deal with HMRC, tell you what you can claim, and file on time, so nothing rests on you remembering a deadline. See how the service works, ask for a fixed-fee quote, or call the office on 01204 840303.

Originally published at ajhaccountant.co.uk/blog/trading-allowance-1000-side-income.