Trading Income Allowance – Making the Most of Your Free Time

In early 2018, HMRC introduced two new annual tax allowances of £1,000 each. These include a trading income allowance as well as an allowance for individuals with property income. These allowances also apply to miscellaneous income like selling small personal assets online and offering your services for monetary compensation.

While the new allowance is more or less straight forward, it does come with its own set of implications. At Newnham & Son, we want to make sure you know all the details about HMRC allowances so that you can put your free time to good use in the most tax efficient way possible.

Your trading income allowance explained

The £1,000 tax free allowance is particularly handy if you’re self-employed with part-time or casual earnings on the side. For example, you could have a part-time gig selling products on eBay. You may also work as a Deliveroo worker in your spare time.

Whatever your side hustle, the self-employed allowance means that if you have a trading income of less than £1,000 in the tax year, you won’t have to declare or pay tax on it. On the other hand, if you earn more than £1,000, you can choose whether you want to deduct the £1,000 allowance from your income or your allowable expenses.

The practical implications

When it comes to the trading income allowance there are some practical implications you should know about. Firstly, if your expenses are less than £1,000 during the tax year, it would be beneficial for you to deduct the trading allowance from it. However, if your expenses are more than £1,000, deducting the expenses will yield lower profits and a lower tax bill.

The second practical implication lies with your actual income. If your trading income is less than £1,000 but you make a loss, you may elect for the allowance not to apply at all. In this instance, your accountant will calculate the loss in the same way and these details will go in your individual tax return. This also means you don’t waste your loss relief.

For example, let’s say you sell clothes to your friends and family, and occasionally on eBay and other websites. During the tax year, you make £700 and your expenditures come up to £100. Because you earnt less than £1,000, you won’t need to report your earnings to HMRC and you won’t have to pay any National Insurance contributions or tax on these earnings. On the other hand, if you earn £1,900 in the tax year and your expenses are £300, your profits will be £900, or £1,900 minus the £1,000 trading allowance.

trading income allowance ecommerce

What if you have multiple trading sources?

When it comes to the self employed tax free allowance, you must take great care if your primary source of income is self-employed and your secondary comes from a different small business. This is because all the income you earn from trading and other casual activities will be combined when considering your allowance.

In this instance, if you claim your allowance, you won’t be able to claim for any expenditures regardless of the number of businesses you’re running and the expenses they incur.

For example, let’s say you’re a self-employed translator with an income of £20,000 a year and expenses of £5,000. You also have casual income selling cakes for £1,500 a year. If you choose to claim your trading allowance against your part-time cake selling gig, you won’t be able to claim your £5,000 of expenses meaning your taxable profit will be the whole £20,000. If you don’t claim your trading income allowance, your taxable profit will be £15,500.

Last but not least, if you have casual income or income from a side gig as well as property income, you can make use of both the trading and the property allowances, thus leaving you with a £2,000 allowance each year.

trading income allowance property

Get professional advice from your accountant

Trading income allowance is a great way for you to earn more money and pay less tax in a legal way. That said, if you don’t know the ins and outs and claim that allowance on the wrong earnings, you could end up paying more tax in the long run. Also, while it’s not necessary for you to send a tax return for income covered by the property or trading allowance, you should do so if you want to pay Class 2 NICs in order to benefit from the state retirement pension or if you want to claim loss relief when your expenses exceed your receipts.

At Newnham & Son, we know how complicated and time consuming this process can be. With this in mind, we’d be more than happy to run you through everything and file your tax return for you so that you don’t miss out on any benefits. To find out more about our services and how we can help you, contact us today. One of our team members will be happy to give you more information about our services.

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