When in receipt of either self-employed income or income from letting out property as a landlord, you may eb eligible to reduce your tax liability through tax-free allowances such as trading allowance and property allowance.
What is the trading allowance?
The trading allowance, or trading income allowance, is a tax-free allowance against income from self-employment of up to £1000 per tax year. If you have more than one type of trading income, you can only claim a maximum allowance of £1000 for each year, although you can choose how to allocate this allowance between your income sources. The trading allowance can also be claimed in addition to your personal allowance for the tax year in question.
How much Income Tax you need to pay will depend on how much income exceeds your personal allowance and how much of that remaining income falls within each tax band. The standard personal allowance for the tax year 2022-23 is set at £12570. This is the amount of income that you do not have to pay tax on, where this can be set against any type of income that you receive. This means that if you earn less than £12570, you will not usually be required to pay any Income Tax, although you may still be liable to pay National Insurance.
If you earn more than £12570, tax will be payable on the amount of taxable income remaining after your personal allowance and any trading allowance has been deducted.
What is the property allowance?
The property allowance, or property income allowance, is a tax-free allowance of up to £1000 per year against any income received from letting out land or property as a landlord. If you have more than one source of rental income, you can again only claim a maximum allowance of £1000 for each tax year. However, if you receive trading ‘and’ property income in any given year, you may be entitled to both the trading allowance and property allowance separately.
As with the trading allowance, you will be entitled to the personal allowance and the property allowance, only paying tax on any income after these allowances have been deducted.
Who can claim the trading and property allowances?
The trading allowance is a tax exemption from HMRC for individuals with trading income from self-employment, provided this is not income from a partnership. You can also claim this allowance against other casual or miscellaneous income, including earnings from services such as babysitting or gardening, or income from selling on online auction sites.
Similarly, the property allowance is a tax exemption from HMRC for those renting out property. If you own property jointly with others, you will each be eligible for the £1000 allowance to set off against your share of the gross rental income. However, you cannot use the property income allowance if you deduct expenses from your rental income from letting a room in your own home, instead of using the Rent a Room Scheme, or if you claim the tax reducer for finance costs such as mortgage interest for a residential property.
If your total gross income from self-employment and other trading activities, or your annual gross property income, is £1000 or less, you will be entitled to ‘full relief’. This is where the whole of this income will be covered by the applicable allowance, although you cannot deduct more than the amount of your income so as to generate a loss. If you earn more than £1000, you can deduct the entire tax-free allowance. This is referred to as ‘partial relief’.
How do the trading and property allowances work?
If your annual gross income from one or more trades or properties is more than £1000, you can use the trading allowance or property allowance or, where applicable, both. This is instead of deducting expenses, where it does not matter if you have not spent more than £1000.
You cannot deduct any of your normal expenses when you claim either the trading or property allowance. This includes where you have multiple income sources and have applied the allowance against one of these sources. This means that if you have receipts of more than £1000 from two sources of trading income, and claim the trading allowance in one business, you may not claim expenses in respect of the other. Equally, if you have two rental properties and claim the property allowance for one, you may again not claim expenses for the other.
HMRC will be looking at your total trading or property income, where you can either elect to offset the £1000 allowance ‘or’ those expenses that had to be spent to earn this income. If you decide to apply the tax-free allowance, your taxable profit will simply be your total income less the allowance, where any amounts you had to spend to earn the income will no longer be deductible, even if the allowance has been applied to only one business or property.
When should trading and property allowances be claimed?
If you have business or rental expenses greater than £1000, it will not be beneficial to claim the trading or property allowance. This is because you will have less taxable profit if you deduct your real expenditure from your income, rather than the allowance, and therefore will pay less tax. Before applying any tax-free allowance, you must assess whether or not this is the most beneficial way to reduce your overall liability to tax. The following ‘trading allowance’ example illustrates when it might be more beneficial to offset expenses:
Jane has a full-time job but regularly sells homemade greetings cards on an online auction website. She has also recently started part-time graphic design work on a self-employed basis. During the 2021/22 tax year, she earned £2400 income from online auction sales, incurring £700 expenses in the process, and £1100 income for the graphic design business, with £900 expenses. Jane can choose how to use the trading allowance, where her options are:
Claim the allowance against the online auction sales: this would give her a taxable profit from this source of £1400 (£2400 – £1000). However, her profit from the graphic design business will be £1100, as she cannot deduct the expenses of £900 if she claims the trading allowance. This means that her total profits liable to income tax and NICs will be £2500.
Claim the allowance against the graphic design income: this would give her a taxable profit from this source of £100 (£1100 – £1000). However, her profit from the online auction sales is £2400, as she cannot deduct expenses of £700 if she claims the trading allowance. This again means that her total profits liable to income tax and NICs will be £2500.
Not claim the trading allowance at all: this would give her a taxable profit of £1700 from online auction sales (£2400 – £700) and £200 from the graphic design business (£1100 – £900). This means that her total profits liable to income tax and NICs will be £1900.
In these circumstances, it would be best for Jane not to claim the trading allowance at all, but instead to offset her actual expenses, as this gives her lower taxable profits and less tax to pay.
Can I claim trading allowance and mileage together?
As with any business expenses, you cannot claim both the trading allowance and mileage. This is because when claiming the £1000 allowance, this is in lieu of any expenses incurred in the running of your business, including vehicle running costs.
Prior to completing your self-assessment return, you will need to assess the totality of your expenses to see whether these are more than £1000. You can claim various expenses against your gross trading profits, provided they relate wholly and exclusively to running your business, and they have been reasonably incurred and are not excessive in cost.
In respect of vehicle costs, you can opt to use HMRC’s simplified expenses. This will allow you to apply a flat rate for mileage of 45p for up to 10,000 miles, reduced to 25p for 10,000+ miles. Unless your vehicle is a tool of your trade, for example, as a delivery driver, it is usually more beneficial to use the flat rate business mileage rather than the actual running costs.
Prior to completing your self-assessment return, you should use the online simplified expenses checker at GOV.UK. In this way, you can compare what you can claim using the flat rates against your actual costs, and add these to your other business-related expenses. You can also use simplified expenses to work out business-related costs when working from home. You should then only apply the trading allowance if your total expenses are less than £1000.
How are trading and property allowances claimed?
If you earn less than £1000 from either trading or property income, where this income is then less than the trading allowance or property allowance, you will be automatically entitled to full relief. You will not be required to register your self-employment or property income with HMRC, nor will you be required to complete a self-assessment tax return.
However, where your income from self-employment or property is above £1000, these must be claimed manually via your self-assessment return. Unlike the personal allowance, which is applied automatically by HMRC when calculating your liability to Income Tax, you must expressly elect to complete the relevant box on the tax return to show that you are claiming an allowance in lieu of deductible expenses, as these are not automatic allowances.
To calculate your liability to Income Tax, the basic formula is to add up all of your taxable income, work out your tax-free allowances, including any trading allowance or property allowance, and deduct these allowances from your taxable income. For the tax year 2022-23, you will then be liable to pay tax on any profits at a rate of 20% for income between £12,571 and £50,270, 40% between £50,271 and £150,000, and 45% for over £150,000.
Do I need to tell HMRC if I earn less than £1000?
From 6 April 2017, gross earnings from self-employment of less than £1,000 are exempt from tax and do not need to be declared on a tax return. Equally, if your annual gross property income is less than £1,000, you will not have to tell HMRC or report this income on a tax return. However, there are some circumstances where you may still need to complete a self-assessment return, even if your trading or property income is less than £1000.
You must register for self-assessment and declare your income on a tax return either when:
- you have made a loss and want to claim relief on a tax return
- you want to pay voluntary Class 2 National Insurance to help qualify for certain benefits
- you want to claim Tax-Free Childcare for childcare costs based on self-employed earnings
- you want to claim the Maternity Allowance based on your self-employment.
When completing a tax return in these circumstances, you will need to manually apply the trading allowance or property allowance to ensure that you still benefit from full relief.
Trading allowance FAQs
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Legal disclaimer
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law or tax rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert professional advice should be sought.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
