HMRC has announced the new hobby trading allowance of £1,000. In simple terms, if your trading income doesn’t exceed £1,000 in the tax year, you won’t pay any tax on your profit. Nonetheless, this still has to be declared on your tax return if you are registered to submit your self-assessment. If you weren’t registered for self-assessment at the point of earning this income, there is no need to register and declare given the sales amount does not exceed £1,000. If your income exceeds the threshold of £1,000 in any tax year, you would be required to register and declare this on your tax return.
Under the new rules applicable from 06th April 2017, tax free allowance of £1,000 on your trading income. It is noteworthy that allowance is available on income rather than profit or in other words your total sales or turnover not the income minus expenses = profit.
Declaration on self-assessment would be the Total Turnover of £1,000 and expenses of £1,000 (which is the allowable trading allowance). This would result in nil income chargeable for tax purposes. If you happen to make more than £1,000 in tax year 2017/18, you can elect to deduct your actual expenses or tax free allowance of £1,000 under expenses section. But remember not to combine the two as only either of these will be allowed to reduce the tax liability.
Above election or strategy is not fixed for following tax years and if claiming of actual expenses results in tax savings in following years, you are always allowed to do so.
Tax free trading allowance is not available in following circumstances:
- If you are trading as a partnership.
- Trading with your own limited company. Sale of any item (even single transaction) to your own company would cease your entitlement to tax free trading allowance. Similar rules apply to an employer or someone closely related to you, or to a partnership of theirs.
- Limit of £1,000 applies to all self-employed trades collectively. Separation of income based on nature or category of trades being done is against the rules.
HMRC also allows for £1,000 allowance for property income at the same time as the trading allowance. So any property income of less than £1,000 a year can be claimed separately. This is in addition to trading allowance of £1,000 in any tax year. In summary, an individual with trading income of up to £1,000 and property income of up to £1,000 in a tax year can claim a total of £2,000. However, property allowance is not allowed if rent-a-room relief is claimed in the same tax year.