Millions of people earn money on the side — selling on eBay, tutoring, dog walking, freelancing, renting a parking space. Most of them either don’t realise they can earn up to £1,000 tax-free, or they over-complicate how it works.
The trading allowance is straightforward, but there are important rules about when to use it, when not to, and how it interacts with Self-Assessment registration.
What Is the Trading Allowance?
The trading allowance is a £1,000 per year exemption from income tax and National Insurance on self-employment and trading income. It was introduced in April 2017 and applies from the 2017/18 tax year onwards.
Key facts:
- Amount: £1,000 gross income per tax year
- Applies to: Self-employment income, trading income, and casual income
- Does NOT apply to: Employment income, property income (has its own separate £1,000 allowance), dividends, savings interest, or income from employment
- Automatically available: No registration or form required if income is below £1,000
What Income Does the Trading Allowance Cover?
| Income type | Trading allowance applies? |
|---|---|
| Freelance writing, design, coding | Yes |
| Tutoring and private lessons | Yes |
| eBay / Vinted / Etsy selling (as a trade) | Yes |
| Dog walking, pet sitting | Yes |
| Food delivery (Deliveroo, Uber Eats) | Yes |
| Renting out a parking space or storage unit | No — use property income allowance |
| Selling personal unwanted possessions | Not taxable at all (not a trade) |
| Employment income | No |
| Rental income from a buy-to-let | No — use property income rules |
| Babysitting/childminding | Yes — if casual work, not employed |
The Trade or Personal Use Test
HMRC distinguishes between trading (buying and selling to make a profit) and simply disposing of personal assets. Clearing your attic and selling old clothes is not trading. Buying second-hand goods specifically to resell at a profit is trading. The line matters for whether the trading allowance or any other tax treatment applies.
Under £1,000 Gross: Nothing to Do
If your total gross trading income in a tax year is £1,000 or less, the exemption is automatic:
- No need to register for Self-Assessment
- No need to tell HMRC
- No income tax or National Insurance due
Example: Sam does some freelance photography on weekends. In 2026/27, he earns £750. Because this is below £1,000, Sam does not have to register for Self-Assessment or pay any tax.
Over £1,000: Two Calculation Options
When your gross trading income exceeds £1,000, you must register for Self-Assessment and report it. You then choose one of two calculation methods:
Method 1: Use the Trading Allowance
Taxable profit = Gross income − £1,000
Example:
- Gross freelance income: £4,200
- Less trading allowance: £1,000
- Taxable profit: £3,200
- No expense records needed
Method 2: Standard Profit Calculation
Taxable profit = Gross income − Actual allowable expenses
Example:
- Gross freelance income: £4,200
- Allowable expenses (equipment, materials, software, mileage): £2,600
- Taxable profit: £1,600
In this case, Method 2 (actual expenses) is significantly better. You cannot use both — choose the one that gives you the lower taxable profit.
Which Method Is Better?
Use the trading allowance if your actual business expenses are less than £1,000.
Use actual expenses if your legitimate business costs exceed £1,000.
| Gross income | Actual expenses | Method 1 taxable | Method 2 taxable | Better method |
|---|---|---|---|---|
| £1,500 | £200 | £500 | £1,300 | Method 1 (allowance) |
| £1,500 | £800 | £500 | £700 | Method 1 (allowance) |
| £1,500 | £1,200 | £500 | £300 | Method 2 (expenses) |
| £5,000 | £800 | £4,000 | £4,200 | Method 1 (allowance) |
| £5,000 | £3,600 | £4,000 | £1,400 | Method 2 (expenses) |
Can You Use the Trading Allowance and Deduct Expenses?
No. This is the most common mistake. If you use the trading allowance, you cannot also deduct actual expenses. The allowance replaces expenses — it is one or the other.
Trying to claim £1,000 trading allowance plus £600 in expenses = incorrect. HMRC will reject this.
The Trading Allowance and Self-Assessment
| Gross income | Do you need to register for Self-Assessment? |
|---|---|
| £1,000 or less | No — automatic exemption |
| More than £1,000 | Yes — register, complete a tax return, choose calculation method |
Important: The trading allowance does not affect the Self-Assessment threshold. If you are required to file for other reasons (e.g., other income, being a director), you still need to report the income even if it falls under £1,000.
The Trading Allowance and National Insurance
Below £1,000 gross income, no National Insurance is due.
Above £1,000, you pay Class 4 NI on profits above the Lower Profits Limit (£12,570 in 2026/27) and may need to pay Class 2 NI (now absorbed into Class 4 in most cases from April 2024).
If your trading profit is below the Lower Profits Limit, you will not owe NI — but you may wish to pay voluntary Class 3 NI to protect your State Pension entitlement.
Partnerships and Sharing Income
Each individual has their own £1,000 trading allowance — it is personal, not per business. If you run an informal partnership with your spouse and each receive £900 from shared activity, both can use the allowance and neither needs to register.
The Property Income Allowance: The Pair
The £1,000 property income allowance is a separate, parallel allowance for property income (parking spaces, storage units) and is independent of the trading allowance. You can claim both:
| Income type | Allowance |
|---|---|
| Trading/self-employment income | £1,000 trading allowance |
| Property income (not Rent-a-Room) | £1,000 property income allowance |
| Room letting in your home | Up to £7,500 Rent-a-Room scheme |
Common Mistakes with the Trading Allowance
| Mistake | Impact |
|---|---|
| Using the trading allowance AND claiming expenses | Invalid return; HMRC will correct it |
| Assuming the allowance applies to employment income | It does not — applies to self-employment only |
| Not registering for SA when income exceeds £1,000 | Failure to file penalty |
| Applying the allowance against property income | Wrong — use Property Income Allowance instead |
| Counting eBay sales of personal items as “trading income” | Overcounting; selling your own belongings is not a trade |
| Forgetting the allowance is per person, not per activity | Two sole traders can’t pool allowances |
Practical Examples
Example 1 — Weekend Crafter
Emma sells handmade candles at craft fairs and on Etsy. In 2026/27, her total gross sales are £820. She has no obligation to register for Self-Assessment and pays no tax on this income.
Example 2 — Online Reseller
James buys and sells vintage electronics. Gross income 2026/27: £6,400. Expenses (purchase price, postage, packaging, eBay fees): £4,100.
- Method 1 (trading allowance): Taxable profit = £6,400 − £1,000 = £5,400
- Method 2 (actual expenses): Taxable profit = £6,400 − £4,100 = £2,300
James uses Method 2. He pays tax on £2,300, not £5,400.
Example 3 — Occasional Tutor
Priya tutors maths students after school. Gross income: £1,400. She has no significant expenses — just the cost of a whiteboard and pens. Using Method 1: taxable profit = £400.