A £1,000 tax free trading allowance was introduced in April 2017. Individuals with trading income of £1,000 or less no longer need to declare or pay tax on this income. The £1,000 trading allowance can also be used for trade with little to no expenses.
The purpose of the £1,000 trading allowance
Prior to April 2017 any individual who earned small amounts from trading income may have needed to register for self-assessment and pay over tax on this income. Potentially there were a lot of individuals who were unknowingly breaking tax laws.
Introducing the £1,000 trading allowance was to simplify the rules and exempt these individuals.
Who benefits from the £1,000 trading allowance?
The main beneficiaries are the micro-entrepreneurs. Typically these are individuals who happen to be good enough at their hobby or past-time that they can then charge a fee for their work or service.
They may charge family or friends for arts and crafts that they’ve created or even sell them via online marketplaces such as Ebay or Facebook.
How does the trading allowance work?
Individuals who earn less than £1,000 trading and miscellaneous income are completely exempt from declaring or paying taxes on this income.
The £1,000 relates to income and not profits. If the income exceeds £1,000 the individual will therefore become subject to self-assessment.
Individuals therefore must monitor their income every year and maintain records which prove that they are below the threshold of £1,000.
Over £1,000 trading income
Individuals which exceed the £1,000 trading income have a choice. They can either:
- Deduct their actual business expenses in the normal manner
- Or elect to deduct the £1,000 trading allowance as its total expenses
Therefore Individuals with expenses over £1,000 would deduct their costs in the normal manner and those with just small overheads of less than £1,000 would choose to elect to deduct the trading allowance.
This choice can then be made on a year by year basis.
An accountant who earns a Gross salary of £40,000 per annum has commenced a trade providing home tuition in mathematics. The income from the tuition is £1,400 and the expenses are £100.
Deducting actual expenses would result in taxable profits of £1,300.
Electing to deduct the £1,000 trading allowance would result in taxable profits of £400.
Therefore clearly this individual would choose the 2nd option.
An individual who is already self-employed can’t pick and choose which relief they want for each trade.
Therefore electing to deduct the trading allowance of £1,000 is likely to be rejected as this would prevent the individual from deducting actual business expenses in the main self-employment.
Let’s assume the employed accountant in the previous example is now a self-employed accountant with income of £40,000 per year and expenses of £10,000 per year. Again the tuition results in income of £1,400 and expenses of £100.
You can’t pick and choose different elections for different trades. Choosing to elect to deduct the £1,000 trading allowance will mean that the expenses of £10,000 in the main trade can therefore no longer be deducted.
Clearly in this scenario the individual will choose to deduct actual business expenses. The 2nd trade would therefore declare profits of £1,300.
The £1,000 trading allowance can be useful. It now exempts a lot of individuals who probably never even realised that they were breaking the law.
It is however very limited in its application, especially for individuals who are already self-employed.
DISCLAIMER – Please note that the content contained in this article is for general information only and is not a substitute for professional advice – read our full disclaimer