The trading allowance is an income tax exemption of £1,000 a year for individuals with small amounts of self-employed, casual or miscellaneous income. If your total gross receipts from these sources are £1,000 or less, they are not taxed and you usually do not need to tell HMRC. If they are more than £1,000, you can choose to deduct a flat £1,000 instead of your actual expenses. The amount is fixed in section 783AD of the Income Tax (Trading and Other Income) Act 2005 and has stayed at £1,000 since it was introduced from 6 April 2017, so it still applies for 2026/27. There is a separate £1,000 property allowance for rental income.
Who can use the trading allowance
The allowance belongs to the individual, not to each business. It covers income from:
- Self-employment. A trade, profession or vocation you carry on alone, not in partnership;
- Casual services. HMRC gives babysitting and gardening as examples;
- Hiring out personal equipment. Such as power tools;
- Other miscellaneous income. Income taxed under the "income not otherwise charged" rules, as defined in section 783AB.
All of these are added together and tested against a single £1,000 limit. Someone who earns £600 from dog walking and £700 from occasional photography has £1,300 of relevant income, so the full exemption does not apply. The test is gross receipts, the total before any expenses, not profit. This is the same whether you use the cash basis or traditional accounting.
Selling your own unwanted belongings is usually not trading at all. HMRC says you are unlikely to pay tax on personal items sold from your home, but if you buy or make goods to sell at a profit you are likely to be trading. If you are unsure which side of the line you are on, our guide to the badges of trade explains how HMRC decides.
Full relief: income of £1,000 or less
If your relevant income for the tax year does not exceed £1,000, you qualify for full relief automatically. Under sections 783AF and 783AG, the profit or loss of each small trade is treated as nil, and so is any miscellaneous income after expenses. There is nothing to elect and nothing to deduct.
For most people this means no tax return. You still have to keep records of the income, such as invoices, bank statements or a simple spreadsheet. HMRC can charge a penalty if records are not accurate, complete and kept for the required period.
You might want to register for Self Assessment anyway. HMRC's guidance gives these reasons:
- Claiming a loss. If expenses exceed income, you can elect not to take full relief so that the loss can be used. The election must be made within one year of the normal Self Assessment filing date for that year;
- Voluntary Class 2 National Insurance. Self-employed people with profits below £7,105 do not have to pay Class 2 but can choose to, at £3.65 a week for 2026/27, to protect their National Insurance record and help qualify for some benefits;
- Tax-Free Childcare or Maternity Allowance. Where eligibility depends on self-employed status or income.
Partial relief: income over £1,000
Once your gross receipts go over £1,000, you have a choice. You can either:
- Deduct actual expenses. Profit is income less allowable business expenses and capital allowances, in the normal way;
- Elect for partial relief. Deduct a flat £1,000 from your gross receipts instead, with no other expenses or allowances.
The partial relief election is made on your tax return and has the same deadline as the loss election: within one year of the normal filing date. For 2025/26 that means by 31 January 2028. You can split the £1,000 between several small trades and miscellaneous income as you choose. However, the deduction cannot create a loss on any of them, so it is only useful when your real costs are below £1,000.
Worked example
Priya works full time and sells handmade jewellery on weekends. In 2026/27 her sales are £3,200, and her materials and stall fees come to £400.
| Actual expenses | Trading allowance | |
|---|---|---|
| Gross receipts | £3,200 | £3,200 |
| Deduction | £400 | £1,000 |
| Taxable profit | £2,800 | £2,200 |
| Tax at 20% | £560 | £440 |
Electing for the allowance saves her £120 of income tax. If her costs had been £1,500, actual expenses would be the better option. The figures assume her salary has already used her personal allowance and she remains a basic rate taxpayer. Her profit is also below £12,570, the level at which Class 4 National Insurance starts, so none is due.
When you cannot use the allowance
The legislation blocks the allowance entirely for a tax year if any of your relevant income includes a payment from:
- Your employer, or your spouse's or civil partner's employer. Section 783AO;
- A partnership in which you or someone connected to you is a partner. Section 783AP;
- A close company in which you or an associate is a participator. This includes your own limited company. Section 783AQ.
The effect is all or nothing. One invoice to a connected company stops relief on all your trading and miscellaneous income for that year, not just that invoice. Partnership trading income is outside the allowance altogether, and the allowance cannot be combined with rent-a-room relief on the same receipts.
Reporting and side effects
HMRC's guidance sets out when you must tell it about your income:
- Gross trading income over £1,000. Register for Self Assessment by 5 October after the end of the tax year. See our guide to registering for Self Assessment;
- Other gross income over £1,000, up to £2,500. Contact HMRC;
- Other income over £2,500. Register for Self Assessment.
Online selling is now more visible. Since 1 January 2024, digital platforms must collect sellers' details and report their earnings to HMRC each January. Sellers are left out only if they make fewer than 30 sales of goods in the calendar year and receive less than €2,000 (about £1,700) for them. A platform report does not by itself mean tax is due, but HMRC will have the figures, so your own records need to match them.
Using the allowance also reduces the income figure used for the High Income Child Benefit Charge and student loan repayments. It does not change your income for Universal Credit purposes.
Sources: HMRC's guidance on tax-free allowances on property and trading income and selling on a digital platform, the self-employed National Insurance rates, and sections 783A to 783AR of ITTOIA 2005. For rental income, see our guide to the property income allowance. For a growing side business, see what you can claim as self-employed.
If your side income is moving beyond £1,000 and you want to know whether the allowance or actual expenses works better, Acumon's accountants for sole traders can prepare the figures and your Self Assessment return.