£1,000 Tax-Free Trading Allowance

12th April 2018

A new £1,000 tax-free trading allowance has been introduced from 6th April 2017. Whether you will benefit from the allowance will depend upon your own individual circumstances. There are many complexities and we have outlined the key points that you should be aware of when considering use of this allowance. 

What is the £1,000 tax-free trading allowance?

In simple terms, the £1,000 trading allowance provides a full exemption from income tax to those individuals with trading and miscellaneous income of £1,000 or less.

This also means that there would be no requirement to register for Self-Assessment Tax or submit a Tax Return for the year in question.

£1,000 tax-free trading allowance

What should you be aware of?

Although very appealing, the complexities of this trading allowance come from the way in which it must be declared.

The key point to remember is that the legislation relates to income not profits.

Therefore, if your income exceeds £1,000, you will need to decide whether to claim your trading expenses incurred within the year or whether to claim what is known as “partial exemption” i.e. you can deduct the £1,000 allowance, with the remaining income being taxed as normal.

If you do elect to claim the allowance, you will be unable to claim any other trading expenditure in the year.

Take these examples:

Example 1

John works in a call centre and makes extra income through selling wooden toys that he makes himself on ebay. His total income was £996 and his costs were £100 (stock, postage and listing costs). As his income is less than £1,000, John can choose to offset the £1,000 allowance against his income for the year. He would have no tax to pay and would not need to complete a Tax Return for the year.

Example 2

Emma works in a call centre and makes extra income through selling home-made candles on Etsy. Her total income for the year was £1,096 and her costs were £200 (stock, postage and listing costs). Although Emma’s profits were exactly the same as in the previous example of John (£896), because her income was over £1,000 then she will need to declare it on her tax return and make an election to deduct the £1,000 trading allowance.

What if you have 2 or more trades?

For the purpose of the trading allowance, the income of all trades are combined.

Therefore, if you already have a successful sole trade, and commence a second trade, you will need to decide whether you would be better off to claim your expenses as normal, or whether to claim the £1,000 allowance.

By claiming the £1,000 allowance, you are prevented from claiming any additional expenditure in either trade.

Exclusions to the Trading Allowance

There are some exclusions that you should be aware of:

  • Partnerships are not allowed to claim the trading allowance
  • The trading allowance can not be used on income already qualifying for ‘rent a room’ relief
  • You will not be able to claim the new relief on any income received from:
    • A company of which you are the principal
    • A partnership where you are a partner
    • An employer or your spouse/civil partner’s employer (see example)

Example 3

Emma continues to sell her home-made candles. The majority of her sales are through online sites. However, if she sells just 1 candle to her employer, or her spouse’s employer, then she will be unable to claim the trading allowance for that year.

Hopefully this article has addressed the main questions you may have regarding this allowance however, if you have any further queries, please do not hesitate to contact us.

Vikki Ashton

 

Vikki.Ashton@ttrbarnes.com

 

 

Scott Laight

Scott.Laight@ttrbarnes.com

 

 

Neil.Ibinson@ttrbarnes.com

Chartered Accountants in Sunderland, offering expertise on everything from Tax and Business Planning,
to Accounts and VAT.