With the rise of the “side hustle,” more individuals are earning income outside of traditional employment. The Trading Allowance is a valuable tax relief designed to simplify tax for those with small amounts of trading or miscellaneous income. For the 2026/27 tax year, this £1,000 allowance can remove the need to report income to HMRC or can offer a simplified way to calculate taxable profits.
This guide explains what the Trading Allowance is, how it works, and when you should (and should not) use it.
What is The Trading Allowance?
The Trading Allowance provides a tax-free allowance of up to £1,000 per tax year for individuals with trading income, self-employment income, or miscellaneous income. It applies to your gross income, meaning your total income before any expenses are deducted.
The allowance is optional and can be used against income from a wide range of activities, including:
- Selling goods online (e.g., on eBay, Vinted, or Etsy).
- Freelance work.
- Providing services in the gig economy.
- Income from hobbies that have started to become more commercial.
This allowance is separate from the personal allowance and the £1,000 property income allowance; you can claim both if you have qualifying income streams.
How The Trading Allowance Works
The way you use the Trading Allowance depends on your total gross trading income for the tax year.
If Your Gross Trading Income is £1,000 or Less
If your total income from trading and miscellaneous sources is £1,000 or less, you can benefit from “full relief”. This means:
- Your relevant income is treated as nil for tax purposes.
- You do not need to register for Self Assessment or declare this income to HMRC.
- You do not pay any Income Tax or National Insurance on this income.
However, using the allowance is optional. You might choose to register for Self Assessment and report the income if, for example, your business made a loss and you wish to claim that loss against other income.
If Your Gross Trading Income is More Than £1,000
If your gross trading income exceeds £1,000, you must register for Self Assessment and declare your income. You then have a choice to make on your tax return:.
- Claim “Partial Relief”: Deduct the £1,000 trading allowance from your gross income to arrive at your taxable profit. If you choose this option, you cannot deduct any of your actual business expenses or capital allowances.
- Use the “Profit Method”: Calculate your taxable profit in the traditional way by deducting your allowable business expenses and capital allowances from your gross income. You do not claim the £1,000 allowance if you choose this route.
You should choose the method that gives you the lowest taxable profit.
| Aspect |
Claiming The Trading Allowance (Partial Relief) |
Claiming Actual Expenses (Profit Method) |
| Calculation |
Gross Income – £1,000 Allowance = Taxable Profit. |
Gross Income – Allowable Expenses = Taxable Profit. |
| Expenses |
No deduction for any business expenses is permitted. |
You deduct all your actual, allowable business expenses. |
| Capital Allowances |
You cannot claim any capital allowances for the tax year. |
You can claim capital allowances on qualifying assets. |
| Making a Loss |
You cannot create a loss. The allowance can only reduce profits to nil. |
If your expenses exceed your income, you can create a trading loss, which may be used to reduce other tax liabilities. |
Important Considerations for the 2026/27 Tax Year
Capital Allowances
If you claim the Trading Allowance, you give up your right to claim capital allowances for that year. This is a key consideration if you have made significant capital purchases (e.g., a computer or van), as claiming capital allowances might provide a greater tax deduction than the £1,000 allowance.
Multiple Trades
The £1,000 allowance applies to the total gross income from all of your trades combined. If you have more than one trade, you can choose how to allocate the allowance between them to achieve the most tax-efficient result, for instance, by using it to preserve losses in one trade while reducing profits in another.
Overlap Relief
Claiming the Trading Allowance can affect the calculation of any overlap relief that is generated in the early years of a trade. If you claim full or partial relief during an overlap period, the amount of overlap relief available in the future may be reduced or eliminated entirely.
For detailed guidance on the application of these rules, you can refer to HMRC’s Business Income Manual from BIM86000 onwards. The primary legislation is contained in sections 783A to 783AR of the Income Tax (Trading and Other Income) Act 2005.
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