Self Employed Trading Allowance guide

The self employed trading allowance is a tax relief designed to simplify the tax system for individuals who earn small amounts of income from self employment, casual work, or miscellaneous income sources.

Our guide provides an overview of the self employed trading allowance, its benefits, eligibility criteria and how it interacts with other aspects of the tax system.

How much is the Self Employed Trading Allowance worth?

The self employed trading allowance is a tax exemption that allows individuals to earn up to £1,000 per tax year from sole trader self employment, casual work, or miscellaneous income without having to pay income tax or national insurance contributions on this income.

Who is eligible to claim the Self Employed Trading Allowance?

HMRC makes the self employed trading allowance available to self employed individuals and is particularly relevant for sole traders involved in the gig economy, sharing economy, or hobby businesses that generate a modest income.

You can claim the self employed trading allowance if you:

• Use the cash basis of accounting for your self employment income Or
• Use the accruals basis of accounting but are eligible to use the cash basis.

The SE trading allowance is available even if you have only traded for part of the tax year.

It’s important to note that the trading allowance is not an automatic allowance like the personal allowance and may need to be specifically claimed in certain circumstances.

How do I claim the Self Employed Trading Allowance?

How you claim and apply the self employed trading allowance usually depends on the level of your income and the value of your business expenses.

The trading allowance can be claimed in full or partially whichever is the most beneficial to you.

Claiming full relief: Trading income of £1,000 or less:

If your total trading income for the tax year is £1,000 or less you can claim full relief under the self employed trading allowance.

This means that your entire trading income will be exempt from income tax and national insurance contributions.

If this is your only income you do not need to register your self employment with HMRC or complete a self assessment tax return.

However you may still want to register for other reasons such as voluntary class 2 national insurance contributions or claiming tax free childcare.

If you are required to complete a self assessment tax return for other reasons the trading allowance can be claimed on the self employment (short) pages of the tax return.

Claiming partial relief: Trading income of more than £1,000:

If your total trading income for the tax year is more than £1,000 you can choose to deduct the self employed trading allowance from your income instead of your actual business expenses. This is known as partial relief.

Claiming partial relief may be beneficial if your business expenses are relatively low or you don’t want to prepare business accounts for tax purposes.

HMRC does not allow you to claim both the trading allowance and your actual business expenses.

As your income exceeds the trading allowance you will typically need to register your self employment with HMRC and complete a self assessment tax return.

The trading allowance can be claimed in the self employment section of a short self assessment tax return.

Can you claim the Trading Allowance for more than one income?

If you have more than one source of trading, casual, or miscellaneous income you can still only claim one self employed trading allowance.

You can choose how to allocate the allowance between your income sources but you should consider the potential tax implications before you submit your tax return.

You cannot claim tax relief for business expenses when you claim the trading allowance so it may not be beneficial to claim the allowance at all in some cases.

The trading allowance can be claimed at the same time as the property income allowance if you receive rental income from property or land.

When not to claim the Self Employed Trading Allowance

There are certain circumstances in which it may not be beneficial to claim the self employed trading allowance. These include:

• If you have business expenses greater than one thousand pounds as you will pay less income tax by deducting your expenses from your trading income rather than claiming the trading allowance.
• If you have made a trading loss it can be more beneficial to complete a self assessment tax return and claim the losses rather than use the trading allowance. The losses can be used in a future tax year to reduce taxable profits.
• If you have multiple trading businesses or types of casual income with total expenses exceeding one thousand pounds you could end up paying more income tax if you claim the trading allowance.

Record keeping and reporting requirements

Regardless of whether you claim the self employed trading allowance it’s important to maintain accurate records of your trading income and expenses.

Small business owners should try to learn about basic accounting principles such as double entry bookkeeping, cash vs accrual accounting methods, income statement generation (profit & loss) and ensuring compliance with HMRC regulations.

Affordable software solutions exist to help automate various aspects of the bookkeeping process while reducing errors and saving you valuable time.

Your accounting records will help you determine your eligibility for the trading allowance and decide whether claiming it is worth it.

Self Employed Trading Allowance and Universal Credit

When claiming tax credits the income used to calculate your tax credits should be after taking into account any deductions for the self employed trading allowance.

For universal credit the trading allowance is not deducted when providing your income to the department for work & pensions (DWP).

The income used when calculating your universal credit will be higher than the income used when calculating your tax because the trading allowance is ignored when calculating your Universal Credit claim.

Impact on student loan repayments

If you claim the self employed trading allowance and are repaying a student loan the income used to calculate your student loan repayments will be the amount after deducting the trading allowance.

This means that your student loan repayments will follow the tax treatment of your trading or casual income.

Self Employed Trading Allowance and your tax position

By understanding the self employed trading allowance and its implications you can make informed decisions about your income tax and self employment status.

Using the allowance smartly can mean less administration for you and potentially reduce your income tax liability.