The £1,000 trading allowance explained
The trading allowance lets you earn up to £1,000 of gross trading income in a tax year without paying tax on it, and if your income is £1,000 or less you usually do not need to tell HMRC. If you earn more than £1,000, you can deduct the £1,000 allowance instead of your actual expenses, which helps when your costs are low.
What the trading allowance covers
The trading allowance is a tax exemption of up to £1,000 each tax year for individuals with trading income from:
- self-employment
- casual services, such as babysitting or gardening
- hiring out personal equipment, such as power tools
Gross income means the total you would put on a tax return before taking off any expenses or allowances. This is the same whether you use the cash basis or traditional accounting.
The £1,000 limit covers all your trades together, not £1,000 for each one.
Income of £1,000 or less: full relief
If your gross trading income for the tax year is £1,000 or less, all of it is covered and there is no tax to pay. GOV.UK calls this full relief.
Example: Mia walks dogs at weekends and takes £850 in the 2026 to 2027 tax year. That is under £1,000, so it is tax free and she usually does not need to tell HMRC.
You must still keep a record of the income. GOV.UK suggests things like copies of invoices, a spreadsheet of payments received, statements from whoever paid you, or bank statements.
Do you need to register as self-employed under £1,000?
Usually not. You must register for Self Assessment if your gross trading income is more than £1,000 in a tax year, and you must do it by 5 October after the end of that tax year.
Even below £1,000, GOV.UK says you must register and send a tax return if you:
- have made a loss and want to claim relief for it
- want to pay voluntary Class 2 National Insurance to help you qualify for benefits
- want to claim Tax-Free Childcare based on your self-employment
- want to claim Maternity Allowance based on your self-employment
- need to register as a subcontractor under the Construction Industry Scheme
You can still use the trading allowance on that return. You can also choose to register earlier than you need to.
Income over £1,000: allowance or expenses?
If your gross trading income is more than £1,000, you can deduct the £1,000 allowance instead of your actual expenses. GOV.UK calls this partial relief. If you claim the allowance, you cannot also deduct expenses or other allowances, such as capital allowances.
The allowance cannot be more than your income, so it can never create a loss. If your real costs are higher than £1,000, claiming them gives you the bigger deduction.
Example 1: Sam sells candles online. Takings are £3,000 and costs are £400. With the allowance, taxable profit is £2,000. With expenses, it is £2,600. The allowance is better.
Example 2: Same takings of £3,000, but costs of £1,800. With expenses, taxable profit is £1,200, compared with £2,000 using the allowance. Expenses are better.
Example 3: Takings of £700 and costs of £900 give a £200 loss. The allowance would make the £700 tax free, but to use the loss you would need to register and claim it on a return.
For what counts as an expense, see allowable expenses for sole traders.
Who cannot use the trading allowance
You cannot use the trading or property allowance in a tax year if you have any trading or property income from:
- a company that you, or someone connected to you, owns or controls
- a partnership where you, or someone connected to you, are a partner
- your employer, or the employer of your spouse or civil partner
The trading allowance also does not apply to trading income from a partnership. See MTD for partnerships for how partners are treated.
Example: an employee who is paid £600 by their own employer for some freelance design work cannot use the trading allowance at all for that tax year, even on income from other customers, so they need to tell HMRC about the income.
The separate £1,000 property allowance
There is also a property allowance of up to £1,000 a year for income from land or property. If you have both kinds of income, you get £1,000 for each.
Joint owners each get their own £1,000 against their share of the gross rent. You cannot use the property allowance on income from letting a room in your home under the Rent a Room Scheme. You also cannot use it if you deduct expenses from room-letting income instead of using the scheme, or if you claim the tax reducer for residential finance costs such as mortgage interest. See MTD for landlords.
Does the trading allowance affect Making Tax Digital?
MTD for Income Tax depends on your qualifying income, which GOV.UK defines as self-employment and property income before expenses. HMRC has not said directly whether claiming the trading allowance changes your qualifying income, and its qualifying income guidance does not list the allowance as something that reduces it.
On its own, £1,000 of trading income is well below the lowest threshold, which is qualifying income of more than £20,000 for 2026 to 2027. See MTD qualifying income.
GOV.UK does cover record keeping. If you are in MTD and claimed the trading allowance on your last tax return, you still need digital records and quarterly updates for that income, and you claim the allowance when you submit your tax return through your software.
GOV.UK's example is a landlord with £60,000 of rent and £1,900 from a side hustle, who must keep digital records for both. You do not need MTD digital records for side income that was below the trading allowance threshold and was not declared on your previous return.
Benefits and student loans
GOV.UK says that if you deduct the trading allowance instead of actual expenses, your income is reduced by the allowance for purposes including the High Income Child Benefit Charge and student loan repayments. Income for Universal Credit is not affected by the allowances.
Keeping the records with Snapfile
Once your side income passes £1,000, receipts help you compare the allowance with your real costs. Snapfile lets you send photos of receipts and invoices, PDFs or texts on WhatsApp. It records them, assigns HMRC expense categories, tracks the tax year and quarter, and exports a CSV. It does not submit anything to HMRC. It is free during early access, with a Pro plan planned at £9.99 a month.
Common questions
Do I need to register as self-employed if I earn under £1,000?
Usually not, as long as your gross trading income is £1,000 or less and you can use the allowance. You must register if you want to claim a loss, pay voluntary Class 2 National Insurance, claim Tax-Free Childcare or Maternity Allowance based on your self-employment, or register for CIS.
Can I claim the £1,000 trading allowance and expenses?
No. If your income is over £1,000 you choose one: the £1,000 allowance or your actual expenses. Claiming the allowance means you cannot deduct any other expenses or allowances.
Is the trading allowance £1,000 per business?
No. It covers your gross income from all your trades together. There is a separate £1,000 property allowance for property income.
Can I use the trading allowance if I am employed?
Yes, as long as none of your trading income in that tax year comes from your employer, or from the employer of your spouse or civil partner. If any of it does, you cannot use the allowance at all for that year.
Is trading allowance income included in MTD qualifying income?
HMRC has not said directly. Qualifying income is defined as income before expenses, and £1,000 on its own is well below the lowest MTD threshold of more than £20,000.
Sources: GOV.UK: Tax-free allowances on property and trading income; GOV.UK: Set up as a sole trader: Register as a sole trader; GOV.UK: Work out your qualifying income for Making Tax Digital for Income Tax; GOV.UK: Find out if and when you need to use Making Tax Digital for Income Tax; GOV.UK: Use Making Tax Digital for Income Tax: Create digital records; GOV.UK: Use Making Tax Digital for Income Tax: Adjust your self-employment and property income; GOV.UK: Find out if you can get an exemption from Making Tax Digital for Income Tax. This is general information, not tax advice; check GOV.UK or an accountant for your situation.
Check where you stand in a minute
Our free Making Tax Digital checker tells you whether and when MTD for Income Tax applies to you. Nothing you type leaves your browser.