What Is the Trading Allowance?
The trading allowance is a £1,000 tax and National Insurance exemption that applies to self-employment and trading income. Introduced in April 2017, it simplifies tax for people with small amounts of self-employment income and removes low-turnover freelancers from the need to register for Self Assessment entirely.
The allowance covers sole trader income, freelance earnings, occasional sale of goods (e.g. on eBay or Etsy), and income from providing services. It does not apply to partnership income, rental income or employed income.
How the Trading Allowance Works
There are two scenarios:
If your total self-employment income is £1,000 or less: You do not need to register for Self Assessment, report the income to HMRC or pay any tax or NI on it. The income is completely exempt.
If your total self-employment income exceeds £1,000: You have a choice. You can either deduct the flat £1,000 allowance from your income (instead of claiming your actual expenses), or you can deduct your actual expenses (if they are higher than £1,000). You cannot claim both in the same tax year for the same income source.
Trading Allowance vs Actual Expenses: Which to Choose?
If your actual allowable business expenses are less than £1,000, claiming the flat trading allowance gives you a larger deduction and reduces your tax bill further. If your actual expenses exceed £1,000 — which is the case for most established freelancers — you should claim actual expenses instead. The choice is made each year, allowing you to pick whichever is more beneficial.
Example: You earn £15,000 from freelance work with £600 in business expenses. The trading allowance (£1,000) gives a larger deduction than actual expenses (£600), so claim the allowance — saving an additional £400 in deductions.
Does the Trading Allowance Affect the Personal Allowance?
No. The trading allowance is separate from the personal allowance. The personal allowance (£12,570) exempts the first portion of income from income tax. The trading allowance exempts the first £1,000 of self-employment income from both income tax and National Insurance, regardless of your total income. They are independent allowances that can both apply simultaneously.