Could the trading allowance help you to save tax?

Do I need to register for self-assessment? This is a question I hear a lot in the run up to 31st January, usually from people supplementing their main income with a side business, such as home tutoring, Airbnb income or e-bay sales.

On 6th April 2017 a £1,000 Trading Allowance was introduced to clarify this point, with the result that you no longer need to declare income from your business or property where it is less than £1,000 per tax year. It should be stressed here that it is the ‘income’ and not the ‘profit’ that should be £1,000 or less.

If your income exceeds £1,000, you then have the option of deducting the actual expenses incurred or the £1,000 Trading Allowance when calculating your taxable profits. So where the expenses incurred are less than £1,000, it should be beneficial to instead deduct the £1,000 Trading Allowance.

The good news is that if you have trading and property income, you get a £1,000 allowance for each type of income. And if you own a property jointly with others, you are each eligible for the £1,000 allowance.

what do you need to do if the gross income is over £1,000?

  • Where the gross income is between £1,000 and £2,500, you will need to contact HMRC to inform them of your situation.
  • Where the gross income is over £2,500 you will need to register for Self-Assessment.
  • If you have two or more sole-trader businesses, then the total income should be combined when determining if the income falls below £1,000.
  • There may be some scenarios where you may choose to voluntarily register for Self-Assessment, such as:
    • to pay voluntary Class 2 NIC’s to protect your benefits,
    • in relation to Tax Free Childcare or Maternity Allowance based on your Sole Trader income,
    • to notify HMRC of a Trading Loss, which could be relieved against other income.

Is the Trading Allowance always available?

There are some scenarios to watch out for where the Trading Allowance is not available, the main ones being:

  • Where the income already qualifies for the ‘Rent a Room’ Relief.
  • That the allowance applies only to Individuals and not to Partnerships.
  • There are restrictions in relation to sales to certain connected parties (such as a connected company or employer), just one of these sales can prevent the allowance applying to the whole income, so do check below if you are not sure.

The above information is a summary of the main points in relation to the Trading Allowance, if you would like to read the full details please see the following link on the government website:

Please feel free to contact me for a free consultation if you have any questions.

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