What Is the Trading Allowance? £1,000 Tax-Free Explained
A simple tax break for side hustles and casual income - earn up to £1,000 a year and HMRC does not want to hear about it.
- What Is the Trading Allowance? £1,000 Tax-Free Explained
- The Trading Allowance is a £1,000 tax-free allowance that lets individuals earn up to £1,000 of gross trading, casual or miscellaneous income in a tax year without paying tax on it or, in most cases, having to register for Self Assessment.
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.
- The Trading Allowance makes the first £1,000 of gross trading or casual income tax-free each year.
- If your total trading income is £1,000 or less, you usually do not need to register or report it at all.
- Once income exceeds £1,000 you must register for Self Assessment, but you can still deduct the £1,000 allowance.
- You cannot claim the £1,000 allowance and your actual expenses - pick whichever leaves you better off.
- It applies to gross income before expenses, and is separate from the £1,000 Property Allowance for rental income.
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 2025/26 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
Frequently asked questions
- What is the Trading Allowance?
- The Trading Allowance is a £1,000 tax-free allowance for individuals with self-employed, casual or miscellaneous income. If your gross trading income for the tax year is £1,000 or less, it is tax-free and you usually do not need to register for Self Assessment or report it at all. Above £1,000 you must register, but you can still deduct the £1,000 allowance instead of your actual expenses.
- Do I need to declare income under £1,000?
- Generally no. If your total gross trading income across all self-employed activities is £1,000 or less in the tax year, full relief applies automatically and you do not need to tell HMRC or file a return. There are exceptions, such as if you are already in Self Assessment for other reasons or the income is from a connected employer.
- Can I claim the Trading Allowance and expenses?
- No, you choose one or the other. You either deduct the £1,000 Trading Allowance from your gross income, or you deduct your actual allowable expenses - whichever gives the lower taxable profit. If your real expenses are less than £1,000, the allowance saves you more; if they exceed £1,000, claim actual expenses instead.
Tax jargon, decoded.
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