Spare time earnings
The new trading tax allowance for individuals of £1,000 was introduced from 6 April 2017 and applies for the 2017/18 tax year onwards.
The allowance means that individuals with trading income below the annual threshold may not need to report it to HMRC and may not need to pay tax on it.
This allowance may be particularly useful to those who sell items online, tutor pupils, babysit, or are self-employed in another form.
- individuals with trading income of £1,000 or less in a tax year will not need to declare or pay tax on that income
- individuals with trading income of more than £1,000 can elect to calculate their profits by deducting the allowance from their income, instead of the actual allowable expenses.
Practical implications of the allowance include:
- where actual expenses are less than £1,000, deducting the trading allowance will be beneficial, whereas if actual expenses are more than £1,000, deducting the actual expenses will give a lower profit figure, and ultimately a lower tax bill
- where income is less than £1,000, but the individual makes a loss, an election for the allowance not to apply may be made - in this case, the loss in the usual way and include the details on their tax return, meaning that loss relief is not wasted
Example – Income less than £1,000
Ellen enjoys knitting in her spare time and often knits baby clothes for her friend’s grandchildren for a small fee. During the 2020/21 tax year, she received income of £700 from this source, and her expenditure on wool & buttons amounted to £300. As Ellen’s trading income is less than £1,000, she does not need to report it to HMRC and she does not need to pay tax or national insurance contributions (NICs) on it.
Example – Income exceeding £1,000
Bobby enjoys baking and makes celebration cakes to order in his spare time. In 2020/2, his income from cake sales is £1,500 and he incurred expenses of £300. As Bobby’s expenditure is less than £1,000, he will be better off if he claims the trading allowance. His taxable profit will be £500 (£1,500 less the trading allowance of £1,000).
Beware! More than one source of trading income
Although the trading allowance may work well for many small-scale traders, care must be taken where a person’s main source of income is from self-employment and their secondary income is from a completely separate small-scale business. HMRC will combine income from all trading and casual activities when considering the trading allowance. In this type of situation, where the allowance is claimed, the individual will not be able to claim for any expenditure, regardless of how many businesses they have and how much their total business expenses are.
Example – More than one income source
Mark is a self-employed aga engineer and has income of £30,000 in 2020/2. His business expenditure for the year is £10,000. In his spare time, Mark buys and sells old collectable Lego via the internet. During 2020/2 he received net income of £1,000 from this source. If Mark claims the trading allowance against his part-time income, he will be unable to claim expenses of £10,000 against his car mechanic income, and his taxable profit for the year will be £30,000. If he doesn’t claim the trading allowance, his taxable profit for the year will be just £21,000.
Rachel’s Top Tip
If you are ever in doubt regarding your self-employed income, relief or expenses, it is best to seek professional advice from an Accountant or Tax Adviser. Most professional individuals/firms offer free initial advice.
Please do not take the advice of someone you met at the pub or a parent at the school gates as gospel, more often than not they are incorrect.