The Ins and Outs of Trading Allowances

The Ins and Outs of Trading Allowances

Only HMRC can make a £1,000 tax free allowance for sole traders a complicated affair. Since their introduction last year, we have received many emails and phone calls from clients wondering about whether or not this will actually save them money on their taxes – which is a reasonable question to ask.

Unfortunately, this is not always the case. That’s why, in this article, the Smart Team will explain what these allowances are, who is and isn’t entitled to them, and whether or not they will actually reduce your tax bill.


What are the new trading allowances?

Two new trading allowances came into play in April 2017. These are the property allowance and the trading allowance. Both offer a £1,000 tax-free allowance for sole traders.

Not only does this mean that sole traders earning less than this amount don’t need to pay taxes on any profits under the threshold, but they don’t even need to notify HMRC.

It is worth mentioning that this is all based on income rather than profits. You will need to closely monitor your income from your business because, if you cross the threshold, you will need to fill out a self-assessment tax return.


Who is affected by this?

The government said that those likely to be affected by this are: “Individuals with small amounts of income from providing goods, services, property or other assets.”

This means that if you turn over less than £1,000 in a year, you will be completely exempt from paying any tax. However, if your income exceeds this, you will still qualify for partial exemption. This is where you can choose to either:

  • Deduct your actual business expenses from trading income, or,
  • Elect instead for the £1,000 trading allowance to be deducted from income.

If you do choose to claim partial relief and you go for the £1,000 deduction option, you won’t be able to deduct any other business expenses. So, the right option for you will depend on your individual circumstances and, specifically, on whether or not you have made over £1,000 worth of deductions.


When can’t you claim the allowance?

These new trading allowances do have some exceptions that you should be aware of, such as:

  • Rent a room

If you’re current using the Rent A Room scheme, then you won’t be eligible for the £1,000 property allowance. You should consult your accountant because you might be better off choosing one option over the other.

  • Partnership

If your income comes from a partnership trade then you also won’t be allowed the £1,000 exemption. These allowances are specifically for sole traders.

  • Employer

Building on that previous point, if income comes from either your employer, your spouse’s employer, or a company that you are a participator of, then you will not be eligible for the relief. This is one landmine that you need to avoid in particular because it can prevent you from claiming the relief for the entire year.

Let’s say that you are employed and you have a side business where you knit jumpers. If you then sell one to your employer (regardless of how many you have sold to other people), you will no longer be entitled to the relief.


Second trades

For the purposes of the £1,000 allowance, all of an individual’s trades are combined together. This means that you only get £1,000 of relief to cover the income of (potentially) multiple side businesses. If you are a sole trader who is starting a second, smaller trade, then this can lead to complications.

For example, if you own a jumper knitting business, but you would like to branch out into photography, you might not be able to claim full relief (if the combined income of both trades exceeds £1,000). This leaves you with one option, partial relief. However, this would mean that you wouldn’t be able to claim back your expenses on your knitting business – making this option less economical.

HMRC has yet to find a solution to this problem.


We can help

If you are a sole trader and you are unsure about whether this £1,000 allowance will actually save you money, get in touch with our team. Call us today on 01202 577 500 or email us at for advice and support.

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