In April 2017, HMRC introduced the trading allowance (sometimes referred to as the hobby allowance) for people earning small sums of money through self-employment, casual or miscellaneous income. Continue reading to discover if you could benefit from the trading allowance.
What is the Trading Allowance?
The trading allowance was introduced for the 2017/18 tax year onwards for people earning small amounts of income from side hobbies, casual or miscellaneous income.
The allowance exempts up to £1,000 of gross income per tax year for hobby activities such as arts and crafts, photography, cake sales, dog walking or earnings from semi-professional activities like musical performances or sporting appearances.
You can claim the £1,000 trading allowance at any point in the tax year when you start the activity.
My trading income is less than £1,000
If your total trading income for the tax year is £1,000 or less, then the whole of your income will be covered by the trading allowance. This is known as the full relief. It is still advised you keep records of your income even though you are not required to complete a tax return.
Sarah has just set up a dog-walking business, and she earns £750 a year from this. Her other income is paid via her umbrella company as a locum nurse. Sarah would not have to register with HMRC as a sole trader or pay tax on any of her business profits as her income is under £1,000 and covered by the trading allowance.
My trading income is more than £1,000
When your income exceeds £1,000, the legislation allows for partial relief. Effectively, individuals can choose to either:
- Deduct their actual business expenses from trading income in the usual way; or,
- Elect instead for the £1,000 trading allowance as a deduction from income.
Please note that you cannot deduct any other expenses, just the £1,000 allowance if you claim partial relief.
You can decide year by year which approach to take depending on the type of business you run and the level of expenses incurred that year. For example:
- Businesses with recurring outgoings (e.g., purchase of stock) are likely to be better off claiming actual expenses.
- Small service businesses with minimal overheads and costs (e.g., a self-employed tutor) are likely to find the trading allowance more beneficial unless they have a one-off large revenue expense in any year.
Do I need to submit a Self-Assessment Tax Return if I work via an Umbrella Company?
If you are a contractor and working via an umbrella company, the umbrella company will ensure you pay the correct amount of tax and National Insurance Contributions (NICs) to HMRC. Therefore, if your only income is paid to you by your umbrella company or your trading income is below the £1,000 threshold – you do not need to submit a self-assessment tax return.
However, if you receive additional sources of untaxed income, you may be required to register for self-assessment and file a tax return.
If you receive any of the following, you will need to submit a self-assessment tax return:
- You are a partner in a business partnership
- You are self-employed and earned more than £1,000
- Foreign income
- Income from dividends, savings or investments
- Commission or tips
- Money from renting out a property
- Some COVID-19 support payments or grants
Check if you need to send a Self-Assessment Tax Return
If you are unsure whether or not you need to file a self-assessment tax return, you can use HMRC’s online tool.
Our sister company has completed over 20,000 Tax Returns
Completing and submitting your tax return can often be a stressful experience, and time is running out to file your tax return. Using an expert accountant to complete your return will ensure it is filed accurately and on time to HMRC.
If you have any questions about submitting a self-assessment tax return or are interested in our sister company completing it for you, please complete the short form on our website or give Churchill Knight a call on 01707 871622.
Are you interested in registering with Umbrella Company UK?
Please complete the short form on our website for more information about Umbrella Company UK’s PAYE umbrella service or to request a free and impartial take-home pay illustration. Alternatively, if you would like to speak to one of our expert Sales Consultants to begin the registration process, please give us a call on 01707 669023.