If you earn money on the side, whether from freelance work, selling handmade goods, dog walking, or any other small trade, the trading allowance is likely to be relevant to you. In short, it lets you earn up to £1,000 per tax year from trading activity before any income tax applies, and knowing how to claim the trading allowance correctly can save you a straightforward admin headache at Self Assessment time.

The rules are simpler than they first appear, but there are a few situations where the allowance works against you rather than for you. We see this fairly regularly with clients who have higher expenses, or who are earning from a connected source without realising it disqualifies them. This post covers the main scenarios so you can make the right call for your own situation.

The trading allowance is a £1,000 tax-free amount that applies to income from self-employment or casual trading. It has been available since the 2017 to 2018 tax year and covers what HMRC describes as relevant trading income, which broadly means money you earn from running a trade or business as an individual.

This includes things like selling items you have made, providing services as a freelancer or contractor, offering tutoring or coaching, or any other activity that counts as trading. It also covers miscellaneous income in certain cases, such as casual income that does not fit neatly into a recognised trade category.

One thing worth noting: if you have both trading income and property income, you get a separate £1,000 allowance for each. They do not stack together against a single £1,000 limit.

The allowance does not apply to income earned through a partnership, or to income from a company that you or someone connected to you owns or controls. It also cannot be used against income from your employer, or from the employer of your spouse or civil partner. These exclusions trip people up more often than you might expect, particularly freelancers who do ad hoc work for their main employer on the side.

If your total gross trading income for the year is £1,000 or less, you qualify for what HMRC calls full relief. This means that income is treated as nil for tax purposes. You do not pay any income tax on it, and in many cases you do not need to report it to HMRC at all.

There are, however, situations where you still need to register for Self Assessment even if your trading income is below £1,000. For example, if you have other income that triggers a Self Assessment requirement, such as income from investments or rental income above a certain threshold, you will still need to file a return. In that case, you simply declare the trading allowance on the return and the income is covered.

A point that catches people out: the £1,000 threshold applies to your combined trading income, not each source separately. So if you earn £600 from photography and £500 from social media management, your total gross trading income is £1,100. That takes you above the threshold, and the full relief no longer applies automatically.

Keeping a clear record of what you have earned across all sources, before any expenses, is important here. HMRC defines the threshold against gross income, not profit, so your expenses do not reduce this figure for the purposes of testing which band you fall into.

If your gross trading income is above £1,000, you have a choice to make. You can either claim partial relief using the trading allowance, or calculate your taxable profit in the usual way by deducting your actual expenses.

Partial relief works like this: instead of working out your expenses, you simply deduct £1,000 from your gross income and pay tax on the difference. So if you earned £2,500 from freelance work, your taxable profit under partial relief would be £1,500. The advantage is simplicity. No receipts to gather, no categories to allocate.

The expenses method gives you the standard calculation: gross income minus actual allowable expenses equals taxable profit. This is almost always the better option if your genuine business expenses exceed £1,000. You cannot claim both: it is one or the other for each tax year.

One important constraint on the trading allowance: it can only reduce your income to nil. It cannot create a loss. So if you have a loss-making trade, the trading allowance is irrelevant and you would want to use the standard expenses method to preserve that loss for future use.

In our experience, most people with low-volume side income and minimal outgoings benefit from partial relief. Anyone running a more active operation with equipment, software, or travel costs should run both calculations before deciding.

Claiming the trading allowance is done through your Self Assessment tax return. If your gross trading income is £1,000 or less and you are already completing a return for another reason, you enter the income and tick the box to apply the allowance. HMRC’s SA103 supplementary pages include a specific field for this.

If your income is above £1,000 and you are opting for partial relief, you again use the SA103 pages. You enter your gross income and indicate that you are using the trading allowance rather than deducting expenses. The calculation is then applied automatically.

If you have not filed a Self Assessment return before and your trading income has gone above £1,000, you need to register with HMRC. The deadline to register for the 2025 to 2026 tax year is 5 October 2026. Filing and payment deadlines for online returns are 31 January 2027. Missing the registration deadline can result in penalties, even if you end up owing little or no tax.

You should keep records of your income even if you are using the trading allowance, because HMRC may ask you to demonstrate that your gross income was within the threshold. Bank statements or a simple spreadsheet of payments received will usually suffice. For more on what records to keep, the How to Register as Self-Employed with HMRC guide is a useful starting point.