The government has introduced two new annual tax allowances for individuals amounting to £1,000 each: one for trading income (sole trade) and one for income from a property business. They can’t be used against such income for a limited company.
The allowances were introduced on 6 April 2017 for the 2017/18 tax year and mean that those with small amounts of income can simplify their personal tax arrangements in certain situations. They may claim both allowances if they have the relevant types of income.
What does this mean for individuals?
Those with small amounts of income from work as a sole trader or a property business (including renting out car park spaces) don’t need to report the first £1,000 of income on their personal tax returns.
If your income from trading or a property business is more than £1,000, then the allowance can be used to reduce your taxable income. You can’t use the £1,000 allowance and, at the same time, claim tax relief for expenses. It’s one or the other. So you need to compare the amount of expenses you incur against the £1,000 allowance to see which is the most tax efficient.
Some examples of how to use the allowance, or whether to use it at all, are shown below.
Example 1 - Trading income under £1,000
John earns £550 a year from being a self-employed handyman. As his income is less than the £1,000 allowance, he’ll be entitled to the full relief and doesn’t need to include the income from this trading activity in his personal tax return.
Example 2 - Trading income over £1,000
Jess earns £1,550 a year from her self-employed photography business. She can use the full allowance to reduce her taxable income from this trading activity to £550 and includes the (£550) amount as income in her personal tax return.
Example 3 - Trading income - claiming £1,000 or not
Lucy earns £20,000 a year from her self-employed film production business. If she uses the allowance she can reduce her taxable income to £19,000.
However, Lucy has expenses related to her business amounting to £5,000 and can use these to reduce her taxable income.
It’s not tax efficient for Lucy to use the new allowance and she should continue to use her business expenses to reduce her taxable income.
Lucy includes £15,000 (income of £20,000 less expenses of £5,000) in her personal tax return.
With property income, those with a UK and overseas property business can choose how to allocate the allowance between the different businesses. However, using the allowance cannot create or increase a loss.
Example 4 - Property income - multiple properties
Geoff has an income of £1,500 from property A and £800 from property B. This results in a total of £2,300 in property income each year.
As his total income from property is more than the £1,000 allowance, Geoff can allocate £800 to property B and the remaining £200 to property A.
Geoff includes £1,300 (income of £2,300 minus the £1,000 allowance) in his personal tax return.
Exceptions to the rule
There are some exceptions where the allowances can’t be used, including:
Trades carried out in partnership aren’t entitled as to avoid adding extra complexity to existing rules
Those who run rent-a-room schemes won’t be entitled to claim the allowance as they’re not classed as relevant trades for the purposes of relief
Shares gained from Property Authorised Investment Fund or a Real Estate Investment Trust are not allowed under this scheme.