Understanding the Trading Allowance: Can It Save You Money?
Published 17th July 2024
Discover how the trading allowance can potentially reduce your tax bill. Learn what qualifies as trading income, the limitations, and how to apply for this tax relief.
What is the Trading Allowance?
In 2017, the UK government introduced the Trading Allowance (TA) as a tax simplification initiative. It allows you to earn up to £1,000 of qualifying income tax-free each year. While this might sound like a golden opportunity, there are specific rules about what qualifies as trading income and how the allowance works.
What Qualifies as Trading Income?
The TA applies to more than just traditional business income. It also covers miscellaneous income—money earned from activities that aren't classified as a trade but generate profit.
For example, helping a neighbour with their garden for a fee could qualify.
What Doesn't Qualify for the Trading Allowance?
Unfortunately, not all income is eligible for the TA. Some key exclusions include:
Income from partnerships
Income from close companies
Income from self-employment if it's your main source of earnings
How Does the Trading Allowance Work?
Determining how the TA applies can be complex. Key points to remember include:
Total Income: The allowance applies to your total trading income.
Accounting Methods: The TA generally doesn't apply if you use standard accounting practices.
Timing of Income: For tax years starting in 2023/24, income is based on what you receive, not what you earn.
Can I Claim the Trading Allowance?
If your trading income is below £1,000, the TA applies automatically. However, there are situations where you might want to opt-in or out of the allowance. For instance:
If your expenses exceed your income, you might benefit from claiming a loss instead of using the TA.
If your income is over £1,000, you can elect to use the full £1,000 allowance.
Need Help
Understanding tax rules can be complex. If you're unsure whether you qualify for the trading allowance or how it might affect your tax bill, contact Hammond-Barr Accountants.
Our experienced team can provide tailored advice to help you maximize your tax savings.
Want to know more?
You can contact Hammond-Barr accountants on 01438 281281 or via email at [email protected].
Share this post: