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Can I Use the Trading Allowance?

If you're a new sole proprietor who wants to run a business full-time, or if you just have a hobby business next door, you may be wondering about taxes. The good news is that there is some kind of tax exemption. Known as a business reduction, it has an impact on the amount of tax you must pay.


Trading Allowance



Trading Allowance

Trade reduction was first introduced in 2017 to provide additional tax relief for independent traders and those with leisure activities. If you are an independent trader with a business income of less than £ 1,000 per year, you do not have to register for the self-assessment or pay taxes on that income.


You will need to register with HMRC if your self-employment income exceeds the £ 1,000 threshold in a tax year.


Claim the Commercial Reduction on my Tax Return

The business allowance can also be deducted from business benefits. This means you can deduct £ 1,000 from your earnings figure, reducing your tax bill.


If you apply for the business allowance, you will also not be able to claim the expenses on your tax return. You can use one or the other, but not both at the same time, so find out which one helps you the most.


For example, if your expenses total £ 1,200 of expenses, claiming them gives you a bigger reduction. If your expenses for the year are £ 750, it will be more useful to claim your bargaining allowance when you return.


Profit and Income

While some use the terms profit and income interchangeably, they mean very different things.


● Income is also called gross income: it is the money that you receive as a business for a certain period of time.

● Profit is the amount you have left after deducting expenses. This is the amount you actually earn.


Is the Business Allowance Based on Earnings or Income?

The business allowance is applied to your gross income, before deduction of taxes and expenses. For instance; has a business income of £ 1,500 in a fiscal year. You will need to register with HMRC and file a self-assessment income tax return, even if you have £ 700 of expenses that bring your earnings to £ 800.


Corporate Relief More Tax-Efficient than an Expense Report

● If you have expenses that total more than the £ 1,000 business allowance, claiming them is more efficient.

● If your total expenses are less than the business allowance of £ 1,000, then it is more tax-efficient to claim your business allowance rather than your expenses.


Trading Allowance UK


More than £ 1,000 Business Income?

If your total business income (before expenses deducted) during the base period of the tax year is more than £ 1,000, you can choose to deduct the business allowance from the business income instead of deducting your actual business expenses for the period. If you do this, the taxable profit from the business will simply be the total income minus the business allowance. For example, if Sarah has a total income of £ 1,700 from selling home-baked goods at local monthly farmers' markets in 2021/22 and decides to claim the business abatement, her taxable profit is £ 700.


It would be beneficial to apply for business relief in this way, called partial relief if you don't have very high business expenses. It also means that you don't need to prepare business accounts for tax purposes. For example, if you run a dog walking business and earn £ 1,400 in the tax year and have expenses of £ 150 then you can apply for the £ 1,000 professional allowance instead. your business expenses of £ 150 (you can't claim both!) and your taxable income will only be £ 400 instead of £ 1,250.




Self-assessment Registration

If it looks like you are going to make more than £ 1,000 a year, you will need to register as a self-employed worker with HMRC. When registering, you will need to file a self-assessment tax return each year.


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