What is the trading allowance?
In April 2017 HMRC introduced a ‘trading allowance’ for people with side hobbies or other sources of casual or miscellaneous income.
The allowance exempts up to £1,000 of gross income per tax year for hobby activities such as cake sales, dog walking, photography, arts and crafts or earnings from semi-professional activities like sporting appearances or musical performances.
The full £1,000 can be claimed regardless of when in the tax year you started the activity and can be helpful for people in developing a personal self-employed activity into a viable commercial business.
If you are not otherwise required to complete a Self-Assessment Tax Return, you do not need to register if your trading income is lower than £1,000 and thus covered by the trading allowance. This is known as full relief, however you must keep records of your income.
If your total self-employment or miscellaneous income is over £1,000 you must register for Self-Assessment and complete a tax return (to includes income from all sources).
Partial Relief V Expenses
You may claim the trading allowance of £1,000 as a deduction if your income is over £1,000, but you cannot then claim other expenses or allowances against the remainder of the trading income. This is known as partial relief and it cannot produce a loss for tax purposes.
If you have more than one trade, you can only claim the trading allowance once.
You may instead find it more beneficial to claim expenses and capital allowances against your trading income rather than using the trading allowance, depending on which approach produces a lower taxable profit figure. You may also be able to claim a self-employed loss on your tax return using this method. You can decide year to year which basis of taxation to use.
Please note that HMRC may not agree with any subsequent loss relief claim if your business producing the losses is not viewed as commercial, for example if you make repeated losses. HMRC may determine you to have a hobby rather than a trading business in such cases.