The trading allowance explained: should you use it or claim expenses?

The trading allowance can simplify small self-employed income, but it is not always the best answer. The choice is usually between a flat £1,000 allowance and claiming your actual allowable expenses.

What the trading allowance is

The trading allowance is a tax allowance for trading, casual, or miscellaneous income. If your gross trading income is £1,000 or less, it may mean you do not need to tell HMRC about that income, subject to the detailed rules and your wider circumstances.

If your trading income is more than £1,000, you may be able to deduct the £1,000 allowance instead of deducting actual expenses. This is sometimes called partial relief.

You normally choose allowance or expenses

The key point is that the allowance is not usually added on top of itemised expenses. You choose the approach that gives the better result and fits your records. If actual allowable expenses are higher than £1,000, itemising expenses is often better. If actual expenses are tiny, the trading allowance may be simpler.

Worked comparison

Suppose you earn £4,000 from side work and have £300 of genuine business expenses.

• Using actual expenses: taxable profit is £3,700.
• Using the trading allowance: taxable profit is £3,000.

In that example, the trading allowance produces the lower taxable profit because £1,000 is more than the actual £300 expenses.

When itemised expenses are better

Now suppose the same £4,000 income came with £1,800 of allowable costs. Actual expenses would leave £2,200 profit, while the trading allowance would leave £3,000. In that case, itemising expenses is better because the real costs exceed the allowance.

Who should be careful

Be careful if you have more than one trade, property income, losses, or benefits/tax credit interactions. The allowance can also affect whether you can create or use a loss. If the numbers matter, check HMRC guidance or ask an accountant before choosing.

How to decide

1. Add up gross income for the trade.
2. Add up actual allowable expenses with evidence.
3. Compare actual expenses with £1,000.
4. Check whether using the allowance creates any downside, such as losing a useful loss.
5. Run the resulting profit through a tax estimate.

Once you have chosen the profit figure, use the self-employed tax calculator to see the tax impact.

Official source

GOV.UK explains the allowance here: Tax-free allowances on property and trading income.