The trading allowance is a simple £1,000 tax-free exemption for side income, freelance work, and casual earning. This guide explains exactly how it works, what income it covers, and when you should use actual expenses instead.
For the full PocketWise guide to side income and self-employment tax, see the Side Hustle Tax Guide or the Self-Employment Hub.
The basic rule: £1,000 tax-free threshold
| Gross trading income | Tax treatment | Self-assessment needed? |
|---|---|---|
| Up to £1,000 | Tax-free; no tax to pay | No (unless HMRC requests) |
| Over £1,000 | Choose: deduct allowance OR deduct actual expenses | Yes — register for self-assessment |
The allowance applies to gross income (before expenses), not profit. A freelancer with £2,000 revenue and £1,500 expenses could choose to deduct the £1,000 allowance (leaving £1,000 taxable profit) or deduct actual expenses of £1,500 (leaving £500 taxable profit). In this case, expenses are the better choice.
What income qualifies for the trading allowance?
Qualifies
- Freelance services (writing, design, photography, tutoring, translation)
- Occasional odd jobs and casual work (gardening, decorating, cleaning)
- Selling handmade items (crafts, art, baked goods)
- Renting out equipment you own (cameras, tools, vehicles)
- Selling items you have made or bought specifically to resell for profit
- Income from online platforms (Etsy, Fiverr, Upwork, TaskRabbit, Deliveroo)
- Income from gig economy platforms (Uber, if you drive)
Does not qualify (different rules apply)
| Income type | Rule |
|---|---|
| Employment income | Taxed under PAYE — trading allowance does not apply |
| Property income (rent, Airbnb, parking, storage) | Covered by separate £1,000 property income allowance |
| Selling your personal possessions | Not trading income — no tax if just decluttering |
| Interest and dividends | Not trading income — different allowances apply |
What about selling personal items?
HMRC distinguishes between:
- Selling personal possessions (old clothes on Vinted, unused electronics on eBay, furniture you no longer want): not taxable — you are not carrying on a trade
- Buying goods to sell for profit, or making items specifically to sell: is taxable — the trading allowance may apply
There is no strict rule about how many sales make you a trader. HMRC considers factors like regularity, intention to make a profit, and whether it is organised and commercial in character. Selling items at car boot sales occasionally is unlikely to be treated as a trade; buying wholesale and selling on repeatedly almost certainly is.
Is it worth registering for self-assessment anyway?
If your trading income is below £1,000, you generally do not need to register for self-assessment. However, consider registering if:
- You make a loss: trading losses can be carried forward to offset future profits, but only if you have registered and reported the loss
- You have other income to declare: for example, rental income over £2,500, overseas income, or employment income over £100,000
- You expect to grow: registering while income is small avoids scrambling to register once you cross £1,000
To register, go to gov.uk/register-for-self-assessment. You have until 5 October after the end of the tax year in which you start trading.
The trading allowance versus actual expenses: which is better?
The answer depends on your expenses relative to £1,000 of income.
When to use the trading allowance
- You have few or no expenses to deduct
- You have poor expense records (the allowance requires no receipts)
- Your expenses are less than £1,000
When to use actual expenses
- Your total allowable business expenses exceed £1,000
- You use a significant home workspace, vehicle mileage, or professional subscriptions
- You want to claim a trading loss (only possible when deducting actual expenses)
Worked comparison
A freelance social media manager earns £4,500 from clients in a year. Their expenses are:
- Subscription software: £300
- Professional development course: £500
- Office supplies and stationery: £150
Option 1 — Trading allowance:
Taxable profit = £4,500 − £1,000 = £3,500
Option 2 — Actual expenses:
Taxable profit = £4,500 − £950 = £3,550
In this example, the trading allowance is marginally better (£50 less profit), but the difference is small. If this freelancer also had mileage claims or home office costs to add, actual expenses could easily overtake the £1,000 allowance.
Platform income reporting: new rules from 2024
From January 2024, digital platforms (Airbnb, Etsy, eBay, Vinted, Uber, Deliveroo, etc.) are required to report sellers’ earnings to HMRC under OECD rules. HMRC receives this data automatically.
This means:
- If you earn over £1,000 on these platforms and do not declare it, HMRC may already know
- Failing to register for self-assessment when required can lead to penalties
- The trading allowance does not protect you from the registration requirement — it only determines whether tax is owed
Trading allowance and National Insurance
Claiming the trading allowance does not exempt you from National Insurance if your trading profits exceed the small profits threshold (£6,845 in 2026/27). However, because the allowance reduces your profit for tax purposes, fewer people are caught by Class 2 or Class 4 NIC when using it.