Understanding the Trading Income Allowance on Tax Returns

income and expenses
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Accidental self-employment is a real thing. What may start as a few hairdressing jobs between friends, some odds and ends traded online, or a few successful bake sales ends up turning your kitchen into a weekend bakery… some can strike it lucky, earning a good chunk of change on their supposed down-time.

The self-employed do not always start in business-building mode. Luck can play a role. When it is on a small scale, it is perfectly allowable to keep every penny you make up to £1,000.

The £1,000 tax-free allowance was first introduced in the UK in the 2017/18 tax year. The principal agenda is to simplify self-assessment reporting for micro-businesses – those earning extra income, but not enough to call a full or even a part-time income.

Broken down into a monthly allowance, it works out to be around £83.33 per month over one year. Or an average of £20 per week.

The type of income you could generate from the sharing economy. Like renting out your drive, or a spare bedroom. It includes renting property, parts of a property, trading, and selling.

Once your income reaches £1,000, then a self-assessment tax return is needed.

If you are certain that your income will not exceed the £1,000 allowance, there is no need to notify HMRC.

There is a voluntary option, which should be considered if you would like to:

  • Make voluntary Class 2 National Insurance Contributions (NICs)
  • Have a record for claiming certain state benefits such as maternity pay
  • Claim help towards the cost of childcare, which requires earnings to meet a minimum threshold (£1,852.38 per quarter) for the government top-ups to be applied to your online account. In such circumstances, it can be beneficial to declare up to £20 per week earnings if it would entitle you to offset the costs with tax-free childcare.

The exception to the voluntary option is for those who have claimed the SEISS grant (Self-Employment Income Support Scheme) at any point during the financial year as the income from that is taxable and must be declared in your self-assessment, regardless of whether you earned under the £1,000 trading income allowance. Other exceptions are those on means-tested benefits such as Universal Credit and similar government support schemes.

What if earnings are over £1,000?

If your earnings are over £1,000, you need to complete a self-assessment tax return. The short version (form SA103S) can be completed. Section 10.1 is where to claim the “Trading Income Allowance”. If you do claim the allowance for the first £1,000 trading income, you cannot claim any other allowable expenses.

Also note that the whole allowance is for the trading year, regardless of when you began trading. If you started trading in January and complete the return by April 5th of the same year, the £1,000 allowance still applies.

Is it Worth Claiming the Trading Income Allowance or Using Actual Business Expenses?

To know which method is right for you, you need to know your operating costs so you can work out your net income – money made minus expenses.

The Trading Income Allowance is for super simple businesses. Nothing complex with loads of overheads. Think of things like providing a dog walking service, or doing summer weeding services or grass trimming services, but not setting yourself up as self-employed.

If you earn over £1,000, you have an option to use the Trading Income Allowance or use your actual business expenses. If your trading costs you £1,000 within the tax year, then you will be better with your actual allowable expenses.

As an example, a hairdresser could charge £50 for a styling job requiring materials costing £30, netting just £20 per job. If travel was involved, it would be less. When your trading income exceeds £1,000, it is crucial to have records showing the money it costs you to make the money you charge.

When you see your earnings are (for example) £2,500 with materials alone costing £1,200, then the Trading Income Allowance would not cover the cost of materials, let alone any other business expense.

To use the above example of £2,500 earnings, if you were to apply the Trading Income Allowance to that, you would have a £1,500 taxable income. If you had business expenses of £1,500, then using your actual expenses would mean your taxable income would be on £1,000, reducing your tax liability by £500 for the year.

How you report your income has an impact on your tax liability, your NICs, possible state benefit entitlements, pension contributions, and a whole lot more.

To ensure you are paying what you need to be, not more or less, you need to be tracking your income and expenses and know how to claim the expenses you are entitled to. You do have options. Some are more expensive than others.

 

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