Trading Income Allowance Explained: The £1,000 Tax-Free Side Income Rule

The trading income allowance, or the trading allowance, lets you earn up to £1,000 in gross trading income each tax year without paying Income Tax on it or registering for Self Assessment in most cases.

The trading allowance can apply to side hustles such as freelancing, selling goods you make, or hiring out personal equipment.

Once your gross trading income exceeds £1,000, different rules apply. Here’s how the allowance works, what income qualifies, and what you need to report to HMRC.

Key points

• Not all income counts as trading income 💰
  Selling personal items you no longer need is generally different from buying goods specifically to resell for profit. However, if you regularly buy stock or provide services with the intention of making money, HMRC is likely to view it as trading.
• Once you earn over £1,000, compare your tax options 🧮
  If your gross trading income exceeds £1,000, you can either claim the £1,000 trading allowance or deduct your actual allowable expenses. The right option depends on your costs, so compare both each tax year.
• Going over £1,000 can mean registering for Self Assessment 📅
  If your gross trading income exceeds £1,000 in a tax year, you generally need to register for Self Assessment by 5 October following the end of that tax year. Keeping track of your gross income throughout the year helps you avoid missing the deadline.
• Keep accurate records and let ANNA handle the admin 🚀
  You should track your income, payments, invoices, and expenses even if you don’t need to report your side income. ANNA covers receipt capture, expense categorisation, invoicing, and real-time tax estimates, helping keep your finances organised as your side hustle grows.

What counts as trading income

The trading allowance covers what HMRC refers to as ‘trading and miscellaneous income’.

That’s a wide net, and it includes earnings from activities like:

• Selling handmade or bought-in goods online
• Doing casual freelance or consultancy work
• Tutoring
• Dog walking
• Hiring out equipment such as tools or a camera
• Taking on one-off or occasional paid jobs outside your main employment

When does selling become trading?

Selling personal possessions you no longer want, such as clearing out your wardrobe on Vinted, is generally not treated as trading. Buying and reselling items may be, and in that case, the income counts towards the £1,000 trading allowance.

The key question is whether you're buying or making goods, or providing services, with the intention of making a profit. If you regularly buy stock, list items for sale, or carry out paid work as an ongoing activity, this is likely to be considered trading.

🧠 Good to know

It doesn't matter whether you make a large profit or only a small amount. The nature of the activity is what matters when deciding whether you’re trading.

How the £1,000 trading income allowance works

The trading allowance lets you treat the first £1,000 of gross trading income each tax year as though it doesn't exist for tax purposes. Add up your gross trading income across everything you do, since the combined figure is what counts.

If your total stays at £1,000 or below, you receive full relief, the income is exempt from Income Tax, and you don’t need to report it to HMRC. However, you should keep records in case you’re ever asked about it.

What happens when you cross the trading allowance threshold

If your gross trading income is more than £1,000 in a tax year, you can choose between using the £1,000 trading allowance or deducting your actual allowable expenses.

With partial relief, you deduct £1,000 from your gross income and pay tax on what remains. Alternatively, you can ignore the trading allowance and deduct your actual business expenses instead.

For example, say you earn £2,200 from tutoring and spend £200 on materials and subscriptions:

• Using the trading allowance: £2,200 - £1,000 = £1,200 taxable profit
• Using actual expenses: £2,200 - £200 = £2,000 taxable profit

In this example, the Trading Allowance results in a lower taxable profit. However, if your allowable expenses exceed £1,000, claiming your actual expenses could be the better option.

Compare the methods each tax year based on your actual expenses.

Someone who buys stock to resell may have high costs, while a freelance designer might have very few business expenses. Your costs can also move around, so the most tax-efficient option can change from one year to the next.

💡 Did you know?

ANNA's Auto Accountant tracks your income and expenses as you go, so you have the figures you need to compare the trading allowance with your actual expenses without having to reconstruct a year’s worth of transactions and receipts.

What’s excluded from the trading allowance

The trading allowance doesn’t apply to every type of side income. HMRC excludes income from certain connected businesses and employers, even if the amount you earn is less than £1,000.

You can’t use the trading allowance if your income comes from:

• A limited company that you, or someone connected to you, owns or controls
• A partnership, whether or not you’re a partner
• Your own employer
• The employer of your spouse or civil partner

What if you freelance for your employer?

You can’t use the trading allowance for freelance work you do for your own employer. This applies even if the work is completely separate from your normal role and you earn less than £1,000 from it.

For example, if you’re employed as a designer and your employer pays you separately for freelance consulting work, that additional income doesn’t qualify for the trading allowance.

Instead, you’ll need to report the income and pay tax on it under the rules that apply to your circumstances.

If you’re doing the work as self employed, you may be able to deduct allowable business expenses when calculating your taxable profit. If the extra work is part of your job rather than a separate engagement, your employer should pay you through payroll instead.

The exclusion is designed to prevent people from restructuring employment income as trading income to benefit from the allowance.

Trading allowance vs property allowance

The trading allowance and property allowance are separate £1,000 allowances for different types of income. The property allowance applies to certain income from letting property or land.

For example, income from renting out a parking space, driveway, or storage space may fall under the property allowance rather than the trading allowance.

If you have both types of income, you can potentially use both allowances and get up to £2,000 of tax-free income. However, you can’t transfer an unused allowance from one category to the other.

When you need to register for Self Assessment

If your gross trading income exceeds £1,000 in a tax year, you need to register for Self Assessment by 5 October following the end of that tax year.

For example, if you earn more than £1,000 from trading during 2026/27, which runs from 6 April 2026 to 5 April 2027, you need to register by 5 October 2027.

You should keep track of your gross income throughout the tax year so you know when you cross the threshold. Missing the registration deadline can result in a penalty.

Different reporting rules can apply if your extra income isn’t from trading, so check with HMRC before you register.

Can you register if you earn less than £1,000?

Even if your gross trading income is below £1,000, you may still want or need to register for Self Assessment if you want to pay voluntary National Insurance contributions to help protect your State Pension or qualify for certain benefits.

If your side income is below the threshold but you have gaps in your National Insurance record, check whether registering and paying voluntary contributions could benefit you.

What’s changing in the future

The government has announced plans to increase the gross trading-income reporting threshold from £1,000 to £3,000. This means the change will affect how you report your income, not how much you can earn tax-free.

The new £3,000 threshold is due to land before the end of this Parliament, but the government hasn’t confirmed the tax year yet. Once it takes effect, people with gross trading income between £1,000 and £3,000 will no longer need to complete a full Self Assessment tax return.

Instead, HMRC plans to introduce a simpler online reporting process for declaring the income and paying any tax due.

That means less paperwork for people with smaller side incomes. The government estimates that up to 300,000 taxpayers will no longer need to submit a full Self Assessment return once the new reporting threshold takes effect.

What records should you keep?

You should keep records of your trading income and expenses even if you don't need to report the income to HMRC. At a minimum, the records should include:

• Money you receive from customers or clients
• The date and amount of each payment
• Invoices or other evidence of sales
• Business expenses and receipts if you might claim them instead of the allowance
• Details of different types of trading income you earn

You should also track gross income rather than profit when checking whether you've crossed the £1,000 threshold. Gross income is the total amount you receive before deducting expenses. For example, if you make £1,200 from selling products but spend £300 on stock, your gross trading income is still £1,200.

Tracking your gross income tells you whether you need to register for Self Assessment, and keeping your expenses alongside it lets you work out which method gives you the lower taxable profit if you go over the allowance.

How ANNA simplifies your side hustle finances

Keeping track of side income is much easier when your bookkeeping happens automatically.

ANNA brings your business finances together, so you can see what you've earned and spent without having to piece everything together at the end of the tax year.

Here’s how ANNA helps:

• Automatic bookkeeping: Keep your income and expenses organised as transactions happen
• Receipt capture: Store receipts digitally to maintain a clear record of your business spending
• Expense categorisation: Automatically organise transactions into the right expense categories
• Invoicing: Create, send, and track invoices for freelance work and other services
• Real-time tax estimates: See an estimate of what you may owe as your income changes
• Business account: Keep your side hustle income and expenses separate from your personal spending with a dedicated UK business account
• Smart Pots: Set money aside for upcoming tax bills and other business costs as you earn
• Free Self Assessment filing: Get support with preparing and filing your Self Assessment tax return
• Corporation Tax: Manage your Corporation Tax obligations and get help with filing
• VAT filing: Keep your VAT records organised and file your VAT returns more easily
• 24/7 UK-based support: Get help with your account and financial admin whenever you need it

Sign up with ANNA and let us handle the admin while you focus on your side hustle.