What Is the Trading Allowance? £1,000 Tax-Free Explained

The rise of the side hustle - selling crafts, freelancing at weekends, renting out a power tool - created a flood of small, awkward amounts of income that the tax system was never designed for. The Trading Allowance is the government's pragmatic fix: a flat £1,000 that lets most casual earners stay out of the tax system entirely.

How the Trading Allowance Works

The allowance applies to your gross trading income - the money in, before any expenses come out. There are two ways it helps:

• Full relief: If your gross trading income for the year is £1,000 or less, it is automatically tax-free. You do not need to register for Self Assessment, file a return, or even mention it to HMRC (with limited exceptions).
• Partial relief: If your gross income is more than £1,000, you must register, but you can choose to deduct the flat £1,000 allowance from your income instead of working out your actual allowable expenses.

The catch is that it is an either/or choice. You deduct the £1,000 allowance or your real expenses, never both.

Gross income

The total income from your trading or casual activity before deducting any costs. The Trading Allowance is measured against this gross figure, not against your profit after expenses.

A Worked Example: When to Use the Allowance

Sam sells handmade candles online as a side venture. In 2026/27 his gross sales are £2,400. His actual allowable expenses - wax, wicks, packaging, postage and a share of his electricity - come to £700.

Because his income exceeds £1,000, Sam must register for Self Assessment. He then has a choice:

• Claim actual expenses: Taxable profit = £2,400 − £700 = £1,700.
• Claim the Trading Allowance: Taxable profit = £2,400 − £1,000 = £1,400.

The Trading Allowance leaves him with £300 less taxable profit, so it is the better option - and it spares him the paperwork of itemising costs. As a basic-rate taxpayer that £300 saves him £60 in income tax. Had his expenses instead been £1,500, claiming actual costs would have won. Run both scenarios in the sole trader calculator.

When You Still Have to Register

Earning over £1,000 means you must register for Self Assessment by 5 October following the end of the tax year. Even comfortably within the £1,000 limit, you may still need to report income if you are already in Self Assessment for another reason, if the income comes from a person connected to your employer, or if you want to register to build a National Insurance record or pay voluntary contributions.

“The Trading Allowance is the tax system quietly admitting that chasing £40 of tax on a weekend hobby costs more than it collects - so it simply lets the small stuff go.”

Trading Allowance vs Property Allowance

The two are siblings, not the same thing. The £1,000 Property Allowance works identically but applies to rental income, and you get both allowances if you have both types of income - £1,000 tax-free trading and a separate £1,000 tax-free property income. Neither can be used to create or increase a loss, and you cannot use the Trading Allowance against income from a partnership you are a member of. Under Making Tax Digital from April 2026, the £1,000 threshold still keeps the smallest traders out of quarterly reporting, since the digital regime only bites well above that level.

Related terms

• Sole trader tax calculator - compare the allowance against your actual expenses.
• Allowable expenses - the alternative to claiming the flat £1,000.
• TapTax blog - guides for side hustlers and casual earners.

People also ask

Is the Trading Allowance per business or per person?

It is per person, not per business. If you have several small self-employed activities, you add their gross income together and the single £1,000 allowance covers the combined total. You cannot claim £1,000 separately for each side hustle.

Can I use the Trading Allowance if I am employed?

Yes. If you have a PAYE job and also earn casual or freelance income on the side, the Trading Allowance applies to that side income. As long as the gross side income is £1,000 or less, it is tax-free and does not need reporting, regardless of your salary.

Does the Trading Allowance reduce my National Insurance?

If your trading income is fully covered by the allowance, no Class 4 National Insurance arises because there is no taxable profit. Above the threshold, the allowance reduces your taxable profit, which in turn reduces the profit on which Class 4 NI is charged.