The £1,000 Trading Allowance Explained
What the £1,000 trading allowance is, who can use it, how it interacts with expenses and MTD, and when it's better to claim actual expenses instead.
The short answer
The trading allowance lets you earn up to £1,000 of gross trading or miscellaneous income tax-free each tax year without reporting it. Above £1,000 you can either deduct the £1,000 allowance instead of your actual expenses, or claim actual expenses — whichever gives the lower taxable profit. You can't claim both the allowance and expenses on the same income.
The trading allowance is one of the simplest tax breaks going — and one of the most misunderstood. Here's how it works.
What it is
Every tax year you can receive up to £1,000 of gross trading or miscellaneous income tax-free. "Gross" means before expenses. If your total qualifying income for the year is £1,000 or less, it's exempt and you generally don't need to report it at all.
Above £1,000: allowance or expenses
If your gross trading income is more than £1,000, you have a choice:
- Deduct the £1,000 allowance from your income instead of your expenses, or
- Deduct your actual expenses.
You pick whichever leaves the lower taxable profit — you can't do both on the same income.
| Your actual expenses | Better option |
|---|---|
| Less than £1,000 | Use the £1,000 allowance |
| More than £1,000 | Claim actual expenses |
Example. You earn £3,000 gross with £400 of expenses. Claiming the £1,000 allowance gives taxable profit of £2,000, which beats deducting £400. If instead your expenses were £1,500, claiming actual expenses (profit £1,500) wins.
How it fits with MTD
- If your gross income is over the MTD threshold, you're in Making Tax Digital regardless — you just apply the allowance when working out your taxable profit.
- If your only trading income is £1,000 or less and tax-free, that source doesn't drag you into MTD on its own.
Watch-outs
- It's per person, per tax year — not per business. If you have two small trades, the £1,000 covers them combined.
- You can't use it against income from a partnership or from a company you control.
- Choosing the allowance one year and expenses the next is fine — decide each year on the numbers.
Key takeaways
- Up to £1,000 gross trading income is tax-free each year.
- Above £1,000, deduct either the allowance or actual expenses — whichever is lower profit.
- It's per person, covering all your small trades combined.
- It doesn't remove you from MTD if you're otherwise over the threshold.
This article is general information, not tax advice. Check the rules at gov.uk or speak to your accountant.
Frequently asked questions
What is the trading allowance?
A tax exemption of up to £1,000 of gross trading or casual income per tax year. If your total such income is £1,000 or less, it's tax-free and you generally don't need to report it. Above £1,000 you deduct either the allowance or your actual expenses.
Can I use the trading allowance and claim expenses?
No — for the same income you choose one or the other. If your actual expenses are more than £1,000, claim expenses. If they're less than £1,000, the allowance is better.
Does the trading allowance affect MTD?
If your gross income is above the MTD threshold you're in MTD regardless, and you apply the allowance as part of your figures. If your only trading income is under £1,000 and tax-free, MTD for that source generally isn't triggered.
Does it apply to a side hustle?
Yes — casual or one-off income like selling online, freelancing or odd jobs counts. If the total across the year is £1,000 or less gross, it's covered by the allowance.
Related reading
The £1,000 Property Allowance Explained
How the £1,000 property allowance works for landlords — tax-free rental income, the choice between the allowance and actual expenses, how it sits alongside MTD, and common mistakes.
MTD for Income Tax Explained for Sole Traders (2026 Guide)
A plain-English guide to Making Tax Digital for Income Tax for sole traders — who's affected, what changes, what you have to do each quarter, and how to get ready before April 2026.
How to Sign Up for MTD for Income Tax: Step by Step
A step-by-step guide to signing up for Making Tax Digital for Income Tax — what you need, how to register with HMRC (or through your software or accountant), and what happens after you join.