As a self-employed individual, there are certain allowances and tax allowances that you may be eligible for. These will usually be based upon your earnings in each financial year, which runs from 6 April to 5 April every calendar year.
In this article, we'll take a look at one of the allowances that you may be able to claim if you are a sole trader and meet the required criteria that have been set out by HMRC.
Individuals who have a trading or miscellaneous self-employment income may be eligible for certain tax allowances. One of which is the Trading Allowance, which means that you can get up to £1,000 in tax-free allowances per financial year. You don't have to pay tax on this £1,000 allowance, including taxes such as National Insurance contributions and Income Tax.
This allowance can be applied to trading, casual or miscellaneous income, including income that is made through a hobby business or from casual services such as babysitting. It can also be applied to the hiring of personal equipment such as power tools.
Continue reading to find out how you can claim for the Trading Allowance, including the type of paperwork that you will need and other eligibility requirements.
You can claim the Trading Allowance if you are self-employed and have a gross income that exceeds £1,000 in a tax year. You can decide whether you want to use the Trading Allowance or your Capital Allowance and actual business expenses when working out your profit against the income you have made.
There's no requirement to contact HMRC if your income is less than £1,000 per financial year, as this doesn't count as taxable income. However, you may have to contact HMRC if you cannot claim the allowances. You cannot use the Trading Allowance if you have made income from a business that you or someone you have connections with owns or controls in some capacity. It's also not possible to claim tax deductions from income made through a partnership or a via an employer. This also applies to income made via a spouse's or civil partner's partnership or employer.
You may also need to contact HMRC if you have been asked to submit a Self Assessment tax return to declare your income. The Trading Allowance is applicable to income made from self-employment activities, including casual services such as gardening or babysitting. You can find out more about other types of taxable income on the government website.
The Trading Allowance is not applicable to trading income that has been made through a partnership. This includes limited companies or any other type of business where you share the business responsibilities with single or multiple partners.
In the instance that the Trading Allowance isn't applicable to you, it's important that you prepare a set of business accounts and make the tax adjustments for the ineligible business expenses and your Capital Allowance.
Do I need to register for Self Assessment?
You do not need to register for a Self Assessment tax return if your expected annual gross income is lower than £1,000. However, you can voluntarily register for it if your income does go above £1,000 in the tax year and you want to complete a Self Assessment tax return.
There are some instances where you are legally required to register and complete a Self Assessment. For example, you must register if you've made a loss through trading and want claim relief on a tax return. You will also have to register if you decide to pay voluntary Class 2 National Insurance contributions in order to qualify for certain benefits, such as a basic state pension or Maternity Allowance.
It's still possible to claim the Trading Allowance if you do not earn over £1,000, but you may need to use the HMRC guidance form to help you complete a Self Assessment tax return.
If your gross income exceeds £1,000 in a financial year, you must register for Self Assessment by 5 October of the following financial year (which will begin 6 April). You can use the allowances by deducting them from the trading or property income that you have made if you are already registered for Self Assessment. However, you are unable to claim for other allowances or expenses if you claim the Trading or Property Allowance.
It's important that you keep certain records if you are claiming the Trading Allowance. This includes documents such as bank statements or copies of your invoices — whether they be electronic or in paper form. It's also a good idea to keep a spreadsheet containing your various income receipts, as well as emails containing evidence that income has been received and statements from companies that show the amount of money you have been paid.
You should also keep records of bank deposits that show pay-in records, along with a diary of appointments with customers and how much income you have made working with each one.
It's a possibility that HMRC will issue your company with a penalty if your records are found to be inaccurate, incomplete or unreadable. They could also fine you if you have not kept records for the required period of time (usually throughout the current financial year).
You can only claim the Trading Allowance for one source of self-employed income. However, you can allocate this allowance between various sources of income. For example, you may earn some income through babysitting as well as gardening, which means that your Trading Allowance can be distributed between the two.
However, in some circumstances, it isn't beneficial to use the Trading Allowance. You may find that you have lower taxable profits overall if you don't claim the allowance, as you cannot claim tax credits for business expenses when you have already claimed the Trading Allowance.
You may be required to recalculate your gross trading income to see what benefits you are able to claim. For example, if you calculate your taxable profit with the deduction of the Taxable Allowance rather than your actual expenses, the income you make will have a reduction of allowances such as:
- tax credits
- student loan
- Married Couples Allowance
- Child benefits
However, Universal Credit will not be affected by these allowances. It's worth contacting HMRC if you are concerned about the impact that claiming Trading Allowance will have on your other benefits or credits.
The Property Allowance is similar to the Trading Allowance, as self-employed individuals are eligible for up to £1,000 in tax-free income if they earn over £1,000 in a tax year. However, the income must be earned through land or property rather than trading or miscellaneous income. You are still eligible for the Property Allowance if you share the property or land with another person. The allowance will be applicable to your share of the gross rental income.
You do not need to inform HMRC if the annual gross property income is less than £1,000. However, you may need to contact them if you cannot use the allowance for one of the following reasons:
- you have claimed the tax reducer for costs such as mortgage interest on a residential property
- you have deducted expenses from the income made from letting a room in your home, and you haven't used the Rent A Room scheme
You won't be able to deduct higher than the amount on your income and have created a loss. HMRC must be informed if you make a gross income of between £1,000 and £2,500 or if your property income is higher than £2,500 and you need to register for Self Assessment.
In instances where you have two businesses and claim the property allowance for one business, you cannot claim the actual expenses that concern the other business. This allowance cannot be used on income that you have made from letting a room in your own home using the Rent A Room Scheme.
The Trading Allowance is a tax exemption that self-employed individuals can claim on their income. The allowance is up to £1,000 of your trading income. This income could be earned through self-employed work, along with casual services or the hiring of personal equipment.
You can use this tax-free allowance instead of deducting other expenses and allowances if your annual gross income from one or more trades is over £1,000. However, if the expenses are more than your income, it could be more financially beneficial to claim expenses rather than this type of allowance.
You will need to keep a number of records if you are claiming the Trading Allowance. This includes bank statements, invoices and receipts. This is so that HMRC can see the income that you have made and can determine whether you are eligible for Trading or Property Allowance.