Since 2017, you’ve been allowed to earn a certain amount each year from “property, trading or miscellaneous income”, tax-free.
This is the trading income allowance, and in this post we’ll explore what it is, how it works, and what your allowance is for the current tax year.
What is the Trading Income Allowance?
The trading allowance is a tax exemption for any trading income you get from:
- Any self-employed work you undertake.
- Casual services, including babysitting, car sharing and gardening.
- Hiring personal equipment, such as power tools.
Unlike the personal income allowance, HMRC does not automatically calculate trading income allowance. You may have to make a specific claim for your trading income allowance as part of your self-assessment tax return.
What is the Allowance for 2020/2021?
The trading income allowance for the 2020-2021 tax year is £1,000. This figure hasn’t changed since HMRC introduced the scheme in 2017, so it’s likely to remain the same for some years yet.
How to Declare Trading Income to HMRC
If you make less than £1,000 a year from trading income, then you don’t have to tell HMRC. But if you make more than £1,000 a year, then you’ll have to complete a self-assessment tax return. In this case, it’s simply a matter of declaring your trading allowance as part of your return.
Do I Have to Keep Records of Trading Income?
Yet even if you made less than £1,000 a year from trading income:
- You must still keep detailed records of all of your income and expenditure for all of your trading. This is because you may still ultimately have to report your income to HMRC – for example, if you want to apply for means-tested benefits such as universal credit.
- You might wish to submit a self-assessment tax return anyway. Doing so will allow you to make voluntary Class 2 National Insurance contributions, which will come in handy if you ever want to claim a state pension, statutory maternity allowance, or contribution-based benefits. Submitting a self-assessment tax return is also essential if you want to claim tax-free childcare.
Self-Assessment Tax Return Deadline!
You can submit your tax return either by paper, or online. For the 2021-2022 tax year, you have until midnight on 31 October 2021 to submit a paper tax return, and until 31 January 2022 to submit your return online.
Submitting a tax return can be challenging if you’ve never done it before. If you need to register for self-assessment tax returns for the first time, we have a helpful step-by-step guide to register for self-assessment to help you get started.
Insurance can provide essential protection against many of the problems that independent traders face, from unpaid invoices to tax disputes. At Tapoly, we specialise in affordable insurance for self-employed freelancers and contractors, with cover starting from just 35p a day.
If you have any questions, or you’d like to discuss your options, you can contact the Tapoly team at info@tapoly.com, call our info line on +44(0)207 846 0180, or use the chat box on our website.