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.
What is Trading Allowance
The Trading Income Allowance in the UK for the tax year 2023/24 is £1,000. This allowance applies to trading, casual, and/or miscellaneous income, allowing individuals to earn up to £1,000 per tax year from these sources without having to pay income tax or National Insurance contributions on this income. If an individual's property or trading income falls below this allowance, they are not required to declare this income or pay tax on it, and the allowance can be used against any trading, casual, or miscellaneous income
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.
What are The Benefits of Trade Allowances?
Ease of Reporting
The Trading Allowance simplifies tax reporting for individuals with minimal trading or casual income, reducing the administrative burden.
Financial Relief
It provides a tax relief of up to £1,000, which can be beneficial for individuals in the lower income bracket.
Encouragement for Micro-Entrepreneurs
By offering a tax-free threshold, it encourages micro-entrepreneurship and casual work, fostering a culture of self-employment and innovation.
Record-Keeping
The allowance reduces the necessity for meticulous record-keeping of expenses, making tax management easier for those with minor trading income.
Flexibility
Individuals have the flexibility to choose between claiming the trading allowance or actual expenses, based on what is more beneficial for their tax situation.
Accessibility
The simplicity and accessibility of the trading allowance make it an attractive option for individuals who may not have a comprehensive understanding of tax laws.
Boost to the Gig Economy
The allowance supports individuals in the gig economy, allowing them to retain more of their earnings.
Incremental Earnings
Allows individuals to earn incrementally without the immediate burden of tax and National Insurance contributions.
Economic Growth
By supporting small-scale entrepreneurs and casual workers, the trading allowance contributes to economic growth and employment.
Awareness and Compliance
The allowance promotes tax awareness and compliance among individuals who might otherwise be unaware of their tax obligations.
Simplified Tax Affairs
It simplifies tax affairs for individuals with multiple sources of income, providing a straightforward way to manage their tax liability.
Cost Efficiency
Reduces costs associated with tax preparation and submission, particularly beneficial for those with lower incomes.
Financial Independence
Encourages financial independence and self-sufficiency among individuals by allowing them to explore self-employment opportunities without the fear of complex tax obligations.
Boost to Informal Sector
Supports the informal sector, encouraging individuals to pursue casual work or micro-entrepreneurial ventures.
Incentivization
Acts as an incentive for individuals to pursue trading or casual work, knowing there's a tax-free threshold.
Educative Value
Educates individuals on tax allowances and reliefs available, promoting a better understanding of tax obligations and benefits.
Prompt Compliance
Encourages prompt tax compliance as individuals with minor trading income find it easier to manage their tax affairs.
Alleviation of Financial Stress
The allowance alleviates financial stress associated with tax obligations for individuals with minimal trading income.
Support to Low-Income Households
Provides support to low-income households by reducing their tax burden, promoting financial stability.
Encouragement to Report Income
Encourages individuals to report their income honestly, promoting a culture of transparency and compliance.
Fostering Entrepreneurial Spirit
The allowance fosters an entrepreneurial spirit by reducing the tax burden on small-scale traders and casual workers.
Boost to Self-Employment Sector
By reducing the tax burden, the trading allowance boosts the self-employment sector, promoting economic diversification.
Understanding the benefits of the Trading Allowance provides a clear perspective on how it impacts individuals with minor trading income and the broader economy. By easing the tax burden and simplifying tax management, it supports financial independence, entrepreneurial ventures, and compliance with tax obligations.
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.
How to Claim Trading Allowance on Tax Return In The UK - A Step-By-Step Guide
Step 1: Determine Eligibility
To begin with, it's crucial to ascertain your eligibility for the Trading Income Allowance. This allowance is available to individuals with trading income or casual income of up to £1,000. If your trading or property income is below this threshold, you qualify for this allowance.
Step 2: Keep Accurate Records
Maintain precise records of all your trading income and related expenses. It’s essential as you may need to provide evidence of your income and expenses if asked by HMRC.
Step 3: Choose the Method
You have two methods to claim the Trading Income Allowance:
Full Allowance Method: Under this method, if your income is £1,000 or less, you don’t have to declare it to HMRC. However, if it's over £1,000, you can elect to deduct the allowance from your income instead of actual expenses.
Actual Expenses Method: Alternatively, you can choose to deduct your actual expenses from your income. It’s beneficial if your expenses are higher than the allowance.
Step 4: Fill out the Tax Return Form
When preparing your tax return, ensure to complete the sections relevant to the Trading Income Allowance. If you are using the Full Allowance Method, you do not have to report this income if it is £1,000 or less. If it's over £1,000, include the income in the appropriate section and the allowance in the deductions section.
Step 5: Online Submission
Now, submit your tax return online through the HMRC website. It’s the quickest and most straightforward way to submit your return, and you can also track the status of your submission.
Step 6: Verify the Information
Double-check all the information you’ve inputted to ensure accuracy before hitting the submit button. Mistakes could lead to processing delays or a request for additional information from HMRC.
Step 7: Keep Copies
It’s advisable to keep copies of your tax return and all relevant documents for at least 22 months following the end of the tax year. This practice will come in handy if HMRC requires any further information.
Step 8: Await Confirmation
Once you’ve submitted your tax return, wait for a confirmation from HMRC. They will review your submission and get back to you if there are any issues or additional information needed.
Step 9: Respond Promptly to HMRC Queries
If HMRC contacts you with any queries regarding your claim for the Trading Income Allowance, respond promptly with the necessary information or clarification.
Step 10: Understand the Implications
Understanding the tax implications and the benefits of the Trading Income Allowance can also be a step towards efficient tax management. It’s beneficial to comprehend how claiming this allowance impacts your tax liability.
This step-by-step guide provides a systematic approach towards claiming the Trading Income Allowance on your tax return in the UK. By following these steps, you can ensure that you claim the allowance accurately and in compliance with the tax laws in the UK.
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.
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 Trading Allowance In Addition To Personal Allowance
Yes, the Trading Allowance is in addition to the Personal Allowance in the UK. While the Trading Allowance covers income from casual or miscellaneous trading, the Personal Allowance is a separate amount that individuals can earn before paying income tax. They are distinct allowances, and you can benefit from both in a given tax year, provided you meet the eligibility criteria for each.
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.
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.
When You Cannot Use Trading Allowance
The Trading Allowance is a convenient provision for individuals with minor trading or casual income. However, there are circumstances where using this allowance isn't permissible:
1. Exceeding the Income Threshold:
If your income from trading or casual work exceeds the stipulated threshold, the allowance is not applicable.
2. Partnership Income:
Income from partnerships is not covered under the trading allowance.
3. Rental Income:
The allowance is primarily for trading or casual income, not for rental income.
4. Incomplete Records:
If you lack accurate records of your income and expenses, utilizing the trading allowance can be challenging.
5. Overlapping Claims:
If you’re claiming expenses against your trading income, you cannot claim the trading allowance simultaneously.
6. Non-Trading Income:
The allowance is not applicable to income that's not generated from trading or casual work.
7. Previous Claims:
If you've claimed the allowance in a previous tax year, and your circumstances have changed, it might not be applicable.
8. Multiple Incomes:
Having multiple sources of income might affect your eligibility for the trading allowance.
9. Existing Allowances:
If you're already benefiting from other allowances, the trading allowance may not be beneficial or permitted.
10. Regulatory Changes:
Stay updated with HMRC guidelines as regulatory changes might affect the applicability of the trading allowance.
11. Company Directors:
The trading allowance is not designed for company directors with significant income.
12. Other Tax Reliefs:
If you’re claiming other tax reliefs, check the compatibility with the trading allowance.
13. Anti-Avoidance Rules:
Ensure you're not falling foul of any anti-avoidance rules when claiming the trading allowance.
14. Income Type Mismatch:
Ensure the nature of your income matches the criteria for claiming the trading allowance.
15. Professional Advice:
If advised by a tax professional that the trading allowance isn't suitable for your situation, it's wise to heed that advice.
16. Complicated Tax Situations:
In complex tax scenarios, the simplicity of the trading allowance might not be beneficial.
17. Higher Expenses:
If your actual expenses are higher than the allowance, it’s not advantageous to claim it.
Understanding the scenarios where the trading allowance is not usable is crucial to ensure you're compliant with tax regulations and making the most of the allowances available to you. Each situation is unique, so it's advisable to consult with a tax professional to understand the implications of the trading allowance on your tax position.