The trading allowance gives individuals £1,000 of tax free trading and miscellaneous income each tax year under Part 6A, Chapter 1 of the Income Tax (Trading and Other Income) Act 2005 (sections 783A to 783AR). If your gross receipts are £1,000 or less, full relief applies automatically and the profit is treated as nil. If they are higher, you can elect for partial relief and deduct a flat £1,000 instead of your actual expenses, which only helps when your real expenses and capital allowances come to less than £1,000.

Who can use the trading allowance?

The allowance is for individuals. Section 783AA covers a trade, profession or vocation carried on by the individual otherwise than in partnership, so a partner cannot use it against a partnership profit share. GOV.UK confirms the allowance does not apply to trading income from a partnership. Section 783AB extends it to miscellaneous income charged under Chapter 8 of Part 5 of the Act, which GOV.UK illustrates with casual services such as babysitting or gardening and with hiring out personal equipment such as power tools.

There are three exclusions, and each one switches the relief off entirely for the year rather than just for the tainted income:

  • Section 783AO: the income includes a payment from your employer, or from the employer of your spouse or civil partner.
  • Section 783AP: the income includes a payment from a partnership in which you, or someone connected with you, is a partner.
  • Section 783AQ: the income includes a payment from a close company in which you, or an associate, is a participator. GOV.UK describes this as a company you or someone connected to you owns or controls.

Section 783AN also prevents the trading allowance applying in some rent a room situations, and rent a room receipts are kept out of the calculation; see rent a room relief. Property income has its own separate £1,000 allowance, explained in the property income allowance. If you have both kinds of income you get £1,000 for each.

How does full relief work?

Under section 783AE you qualify for full relief if your relevant income for the year does not exceed £1,000 and you have not elected out. Relevant income means the gross receipts of all your relevant trades plus your miscellaneous income (section 783AC). GOV.UK stresses that gross means the total before any allowances or expenses, whether you use the cash basis or traditional accounting.

With full relief, section 783AF treats the profits or losses of each trade as nil. That means no Income Tax and no Class 4 National Insurance on that income. GOV.UK says that if your gross trading income is £1,000 or less you do not normally need to tell HMRC, but you must register for Self Assessment and file a return if, for example:

  • you have made a loss and want relief for it;
  • you want to pay voluntary Class 2 National Insurance to protect benefit entitlement;
  • you want to claim Tax Free Childcare or Maternity Allowance based on your self employment.

Because full relief also wipes out losses, someone with a loss must elect under section 783AL not to have full relief. That election, and the election for partial relief under section 783AM, must be made on or before the first anniversary of the normal Self Assessment filing date for the year. For 2026 to 2027, the online return is due by 31 January 2028 under section 8(1D) of the Taxes Management Act 1970, so the election deadline is 31 January 2029.

How does partial relief work?

If your relevant income is more than £1,000 you can elect for partial relief (section 783AH). Section 783AI then calculates the profit as gross receipts minus the £1,000 allowance. GOV.UK is clear that if you use the allowance you cannot deduct any other expenses or allowances, which rules out capital allowances on equipment and the flat rate simplified expenses.

If you have more than one trade, or a trade and some miscellaneous income, section 783AK lets you decide how to split the £1,000 between them, but the deduction cannot turn any one source into a loss. In short, partial relief can reduce a profit to nil but never below.

When does claiming actual expenses give a better result?

The comparison is simple: deduct whichever is higher, £1,000 or your total allowable expenses plus capital allowances. The table uses invented figures.

Illustration only Gross income Actual costs Taxable with allowance Taxable with actual costs Better choice
Weekend craft stall £800 £150 Nil (full relief) £650 Allowance
Online tutoring £4,000 £300 £3,000 £3,700 Allowance
Mobile hairdressing £4,000 £2,400 £3,000 £1,600 Actual costs
New photography business £900 £1,500 Nil, but loss lost Loss of £600 Elect out to use the loss

Actual costs usually win where you buy equipment in the year, because capital allowances such as the annual investment allowance are only available if you claim actual expenses. They can also win once you count costs people forget, such as mileage and use of home, which are explained in simplified expenses and allowable business expenses. The allowance tends to win for low cost activities such as tutoring, pet sitting or selling services online, where expenses are small and record keeping for costs is patchy.

Does using the allowance affect anything else?

Yes. GOV.UK says that if you calculate taxable profits by deducting the allowance rather than actual expenses, your income is reduced by the allowance for tax credits, the High Income Child Benefit Charge, student loan repayments and Married Couple’s Allowance. Income for Universal Credit is not affected by the allowances.

The allowance also interacts with registration. GOV.UK’s current sole trader guidance says you must register for Self Assessment if you earn more than £1,000 in a tax year, and the deadline is 5 October after the end of that tax year; see how to register as self employed. In March 2025 the government announced plans to raise the Self Assessment reporting threshold for trading income from £1,000 to £3,000 gross within this Parliament. That announcement concerns who must file, not the size of the allowance in section 783AD, and the published guidance has not yet changed.

What records do you need if you use the allowance?

GOV.UK says that if you use the trading or property allowances you must still keep a record of your income, and gives examples: copies of invoices, a spreadsheet of receipts, emails confirming payments, statements from the platform or company that paid you, bank statements and pay in records, or a diary showing income from each customer. HMRC can charge a penalty if the records are not accurate, complete and readable or are not kept for the required period. Keeping a note of costs as well is sensible, because it is the only way to know whether actual expenses would have been better.

What mistakes do people make?

  • Testing profit instead of turnover. The £1,000 limit for full relief is measured on gross receipts. A seller with £1,400 of sales and £600 of costs does not qualify for full relief.
  • Deducting the allowance and expenses together. Partial relief replaces all expenses and capital allowances.
  • Using it on income from your own company or your employer. Sections 783AO and 783AQ remove the relief for the whole year.
  • Using it against a partnership share. Only trades carried on alone qualify.
  • Losing a loss. Full relief is automatic, so a loss making first year needs an election out by the deadline.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.