1. The trading income allowance is a tax allowance that is available to UK taxpayers who earn additional money on the side. This could be money they make aside from their usual income or income earned by self-employed individuals. Eligible individuals can earn up to £1000 of tax-free income without having to notify HMRC or register as self-employed.
2. Those who earn over £1000, will need to declare their earnings to HMRC and complete self-assessments each applicable tax year in order to declare their earnings.
3. The UK trading allowance cannot be claimed by employees through employed income or through income from a limited company or partnership.
4. Individuals cannot claim the trading tax allowance along with deducting business expenses, it must be one or the other.
The trading income allowance or UK trading allowance is a UK tax allowance available to people who earn extra money aside from their usual employed income or income earned by self-employed individuals. Eligible people can claim up to £1000 if they earn side money from hobbies or side hustles. This is ideal as it means that in most cases, they do not have to declare this income to HMRC, or register as self-employed, and can essentially earn tax-free money if they fall under the eligibility criteria.
The income covered by this allowance is called ‘trading income’ and it means that all UK taxpayers can claim this tax-free allowance in each tax year. It must, however, be noted that the trading allowance cannot be claimed through employment as taxes are deducted through the PAYE system and outlined on employee payslips. The income allowance can also not be claimed from money earned through a limited company or partnership.
It is also important to bear in mind that UK taxpayers are also entitled to a ‘personal allowance’ which means that they need to earn a certain amount before having to pay tax.
The definition of the trading allowance
The trading allowance is a tax-free allowance that allows an individual to earn up to £1000 each tax year from self-employment without being taxed on that amount. The trading allowance is applicable to people who perhaps earn extra money for casual work or one-off jobs and as a result, earn up to £1000 extra outside of their usual employment. This may include side hustle income such as Avon sales, gardening, babysitting, or selling on Amazon. This means that those people may not need to declare these extra earnings to HMRC by way of a tax return.
Those who earn below £1000 and are not already required to fill out self-assessments for HMRC will not need to notify HMRC of the earnings, providing they are below this amount. It is advised that people keep track of their earnings in case they do rise above the £1000 mark. If the earnings do go above this trading income allowance, individuals will need to register as self-employed with HMRC which involves applying for a Unique Trading Reference number (UTR) and filing self-assessments.
Self-employed people who already declare their earnings to HMRC can still claim the trading allowance of up to £1000 when filling in their tax returns.
How do tax returns for self-employed in the UK work?
Tax is usually deducted automatically from wages for employees, however, in the UK, self-employed people are obliged to complete a self-assessment tax return each tax year. This consists of the self-employed person keeping receipts and invoices or bank statements evidencing their expenses and how much they have earned in the particular tax year. They will then need to input that information into the self-assessment and submit it to Her Majesty’s Revenue and Customs (HMRC) who will calculate what the individual owes in tax based on what they have declared.
While receipts and invoices do not need to be provided in the first instance, they must be provided to HMRC when requested, such as during an audit.
Who can claim the UK trading allowance?
The UK trading allowance applies to those who are earning small amounts of money (below £1000 per tax year) in self-employed earnings. This is usually suitable for those earning casual amounts by doing extra work or by selling items as a hobby. If an individual earns more than £1000 in casual income, they can claim “partial relief” under the trading allowance, meaning they can take away £1000 from their income.
Individuals do not usually have to submit a self-assessment if they are claiming the trading allowance, but they will have to submit one if they are seeking partial relief as HMRC will need to be sure that the correct amount is being taxed.
Therefore, for self-employed people who earn more than £1000 per tax year, a self-assessment must be completed. If a person is using the trading allowance, they must keep records of income and expenditure including copies of relevant documents and spreadsheets of income receipts.
However, the £1000 trading allowance cannot be used to generate a tax loss. Any money left after the allowance is taken is extra money not used in the allowance.
It must be noted that the trading allowance cannot be claimed for employed income as applicable tax contributions and other deductions such as pensions are already considered when an employee’s income is calculated through the PAYE system.
The trading allowance is also not available to those who receive income from a limited company or partnership.
Do umbrella companies or PEOs deduct the trading allowance?
An umbrella company employs or hires staff for a client company, similar to what is called an Employer of Record (‘EOR’) or Professional Employer Organization (‘PEO’) in other jurisdictions.
UK government has recently introduced the Inland Revenue 35 or ‘IR35 off-payroll working rules which have made hiring a reputable umbrella company more important than ever: This new law means that the UK government puts the onus on employers to establish whether the IR35 rules apply to their agreements and whether a worker should be classified as an independent contractor or an employee. By hiring an umbrella company or PEO you can ensure that you are not ‘disguising employment‘ or ‘misclassifying employees’, and can therefore avoid possible fines and back-tax implications.
Umbrella companies, strictly speaking, specialize in employment, and therefore withhold the employee’s income tax: They do not pay the trading allowance because this allowance does not apply to employed income.
Some umbrella companies may offer contractor management services as well (see below). But even then, they do not manage trading allowance payments.
Do contractor management outsourcing (CMO) firms claim the trading allowance?
A Contractor Management Outsourcing (CMO) is a service that transfers a business’ contractor management to an alternative provider, external to the company.
The role of a CMO includes managing invoices with independent contractors, but the independent contractor will still be required to pay their own taxes and tax allowances by submitting their self-assessment to HMRC.
Can I claim the trading allowance, and deduct business expenses?
The trading allowance cannot be claimed alongside business expenses. Therefore, an individual will need to decide whether to either claim the trading allowance or declare and deduct business expenses from their overall income. If you claim the trade allowance, you cannot claim other allowances on the income such as capital allowances.
Deducting the trade allowance is an obligation on individual workers, not their clients or employers. However, If you require general assistance when doing business in the UK, Horizons can provide you will all the help you need to comply with local laws. Do not hesitate to contact us for more information.
Frequently asked questions
Yes, you can claim both property allowance and trading allowance. The property allowance is also a tax allowance in which individuals who earn up to £1000 from property or land can claim exemption.
If you are employed and earn extra income on the side of up to £1000, you can claim the UK trading allowance. You cannot however claim the income allowance through employed earnings that you receive through your employer via a payslip.