One of the most confusing rules for sole traders and side-hustlers is whether to claim the trading allowance or expenses — because you can’t claim both. Get this wrong and you’re either leaving money on the table or risking an HMRC correction.
This question comes up constantly. A Reddit user on r/HMRC, a PAYE employee doing consultancy on the side, filed their first Self Assessment without knowing the trading allowance existed. They declared all their side income and paid 40% tax on the full amount. They could have saved £400 by claiming the allowance — and they’re not alone.
According to HMRC’s guidance on tax-free allowances, the trading allowance gives you a flat £1,000 deduction from your self-employment income — no receipts needed. But the either/or rule with actual expenses catches many people out.
What Is the £1,000 Trading Allowance?
The trading allowance is a flat £1,000 deduction from your self-employment income. You don’t need receipts. You don’t need to prove what you spent it on. You just deduct £1,000 from your business income and pay tax on the rest.
According to HMRC’s trading allowance guidance, it applies to:
- Sole traders and self-employed individuals
- Casual income (e.g., tutoring, freelance work, selling on eBay)
- Income from providing services
It does not apply to:
- Income from your employer (or your spouse’s employer)
- Partnership income (different rules apply)
- Rental income (that has its own £1,000 property allowance — see below)
Trading Allowance or Expenses: The Either/Or Rule
Here’s the critical rule: you can claim the trading allowance OR your actual expenses, but never both.
This means you need to work out which one gives you the bigger tax saving. The math is straightforward — compare your total actual expenses against the £1,000 flat allowance.
If your expenses are under £1,000
Claim the trading allowance. It’s simpler, requires no receipts, and gives you a bigger deduction.
Example: You earned £3,000 from freelance work and had £400 of actual expenses (software, phone calls, travel).
- Trading allowance: £3,000 - £1,000 = £2,000 taxable
- Actual expenses: £3,000 - £400 = £2,600 taxable
- Trading allowance wins — you pay tax on £600 less
- At 20% tax, that’s a saving of £120. At 40%, it’s £240.
If your expenses are over £1,000
Claim actual expenses. You’ll get a bigger deduction, but you need receipts to back it up.
Example: You earned £30,000 from your business and had £6,000 of actual expenses (equipment, rent, utilities, travel).
- Trading allowance: £30,000 - £1,000 = £29,000 taxable
- Actual expenses: £30,000 - £6,000 = £24,000 taxable
- Actual expenses win — you pay tax on £5,000 less
- At 20% tax, that’s a saving of £1,000. At 40%, it’s £2,000.
The break-even point
The break-even point is exactly £1,000 in expenses. If your actual expenses are £999, claim the trading allowance. If they’re £1,001, claim actual expenses. In practice, if you’re close to the threshold, claim actual expenses — the extra £1 in deduction isn’t worth the risk of HMRC questioning your receipt-free £1,000 claim if your real expenses are similar.
The Tax Bracket Confusion
A common misunderstanding — seen in the Reddit thread that prompted this post — is that the trading allowance is £500 for higher-rate (40%) taxpayers.
It’s not. The trading allowance is £1,000 for everyone, regardless of tax bracket.
The £500 figure that confuses people is the Personal Savings Allowance, which is:
- £1,000 for basic-rate (20%) taxpayers
- £500 for higher-rate (40%) taxpayers
- £0 for additional-rate (45%) taxpayers
These are completely different allowances for completely different types of income. The trading allowance applies to self-employment income. The Personal Savings Allowance applies to savings interest. Don’t mix them up.
The Reddit user who prompted this post was a 40% taxpayer who assumed the trading allowance was £500 for them. They declared all their side income without claiming any allowance, paying 40% tax on the full amount. Had they claimed the £1,000 trading allowance, they would have saved £400 (£1,000 × 40%).
Where to Claim the Trading Allowance on Your Return
If you decide the trading allowance is better for you, here’s where it goes on your Self Assessment tax return:
- Full Self Assessment (SA103F): Box 16.1 — “Trading Income Allowance”
- Short Self Assessment (SA103S): Box 10.1
You declare your full income in the turnover box, then enter £1,000 in the trading allowance box. HMRC subtracts it automatically.
If you’re claiming actual expenses instead, you enter each expense category in the relevant boxes (materials, travel, office costs, etc.) on the same form. The HMRC guidance on self-employment expenses lists what’s allowable.
If you’re amending a return where you forgot to claim it, see our guide on what to do if you made a mistake on your Self Assessment.
When You Cannot Use the Trading Allowance
The trading allowance has a specific exclusion that catches people out: you cannot use it if the income came from your employer or your spouse’s employer.
For example:
- ✅ You do freelance web design for a company unrelated to your day job — trading allowance applies
- ✅ You sell handmade crafts on Etsy — trading allowance applies
- ✅ You tutor students independently — trading allowance applies
- ❌ Your employer pays you for extra work “outside PAYE” — trading allowance does not apply
- ❌ Your spouse’s company pays you for consultancy — trading allowance does not apply
If you’re in the ❌ category, you’ll need to claim actual expenses instead (if any).
The £1,000 Property Allowance — A Separate Thing
Don’t confuse the trading allowance with the property allowance, which is also £1,000 but applies to rental income. According to HMRC’s property allowance guidance, the property allowance works the same way:
- Flat £1,000 deduction from rental income
- Either/or with actual property expenses
- No receipts needed
If you have both self-employment income and rental income, you can claim both allowances — £1,000 against your trading income and £1,000 against your rental income. They’re separate allowances for separate income types.
Can You Change Your Mind Later?
Yes. If you claimed actual expenses but realise the trading allowance would have been better (or vice versa), you can amend your return within 12 months of the filing deadline, as per HMRC’s corrections guidance.
One Reddit user reported going back and claiming the trading allowance 2 years later — HMRC accepted it, though this is beyond the standard amendment window and required an overpayment relief claim. See our guide on made a mistake on your Self Assessment for how this works.
What happens if you switch from actual expenses to the trading allowance?
If you’ve been claiming actual expenses for years and want to switch to the trading allowance, you can do so for any tax year within the amendment window. There’s no requirement to use the same method every year — you can switch between the trading allowance and actual expenses from year to year as your circumstances change.
However, if you’ve been claiming capital allowances on equipment (e.g., a £2,000 laptop claimed via AIA), switching to the trading allowance means you can’t claim any expenses at all — including capital allowances. You may need to consider whether the £1,000 flat allowance is worth more than your annual capital allowance claims.
Worked Example: Which Is Better at Different Income Levels?
Here’s a comparison at three different income levels, assuming typical expense ratios:
Low income: £5,000 self-employment income, £300 expenses
| Method | Taxable income | Tax at 20% | Tax at 40% |
|---|---|---|---|
| Trading allowance | £4,000 | £800 | £1,600 |
| Actual expenses | £4,700 | £940 | £1,880 |
| Saving with trading allowance | £140 | £280 |
Medium income: £25,000 self-employment income, £3,500 expenses
| Method | Taxable income | Tax at 20% | Tax at 40% |
|---|---|---|---|
| Trading allowance | £24,000 | £4,800 | £9,600 |
| Actual expenses | £21,500 | £4,300 | £8,600 |
| Saving with actual expenses | £500 | £1,000 |
High income: £60,000 self-employment income, £12,000 expenses
| Method | Taxable income | Tax at 20% | Tax at 40% |
|---|---|---|---|
| Trading allowance | £59,000 | £11,800 | £23,600 |
| Actual expenses | £48,000 | £9,600 | £19,200 |
| Saving with actual expenses | £2,200 | £4,400 |
The pattern is clear: the higher your expenses relative to the £1,000 allowance, the more you benefit from claiming actual expenses.
The Bottom Line
The decision is simple math:
- Total expenses < £1,000 → claim the trading allowance
- Total expenses > £1,000 → claim actual expenses
- No expenses at all → claim the trading allowance (it’s free money)
- Income from employer or spouse’s employer → must claim actual expenses (trading allowance not available)
Don’t overthink it. And don’t miss it entirely — as the Reddit thread shows, plenty of first-time filers do. If you forgot to claim, you can amend within 12 months, or claim overpayment relief for up to 4 years.
For a full breakdown of what counts as an allowable expense, see our guide to allowable expenses for sole traders. For help amending a return where you missed the allowance, see made a mistake on your Self Assessment.
Trading Allowance vs Expenses Calculator
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