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. If you work for a gig platform like Deliveroo or Uber, see our gig economy tax guide for how the trading allowance applies to platform income.
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.
See this applied on a real return in our Self Assessment tax return example, which shows the either/or decision in the context of a complete SA100 filing.
One point that catches side-hustlers: the £1,000 threshold is on all your trading income combined, not per activity. If you earn £600 selling crafts on Etsy and £500 from freelance tutoring, your total is £1,100 — you’re over the threshold and must register for Self Assessment, even though neither activity hits £1,000 on its own. HMRC’s Help for Hustles campaign includes a free online tool to check whether you need to declare your side income. If you do, new entrants must register by 5 October 2026 for the 2025/26 tax year, and file and pay by 31 January 2027.
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.
Use our trading allowance vs expenses calculator to compare both methods side by side and see which one saves you more tax.
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%). For the current tax bands and how the Personal Allowance interacts with side income, see our 2026/27 guide.
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. Note that Self Assessment is being replaced by Making Tax Digital for Income Tax from April 2026, but the trading allowance rules themselves don’t change — the same £1,000 either/or logic applies under MTD.
- 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. If you run multiple trades, see our guide on MTD for freelancers with multiple trades for how the allowance interacts with separate quarterly updates.
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.
4 Common Myths About the Trading Allowance
The trading allowance is simple in principle — £1,000 off your trading income, no receipts needed. But a handful of myths circulate in forums and social media that cost people real money. Here are the four most common ones, debunked.
Myth 1: “The trading allowance is £500 for higher-rate taxpayers”
Background: A common confusion — seen in the Reddit thread that prompted this article — is that the trading allowance is reduced to £500 for 40% taxpayers.
The reality: The trading allowance is £1,000 for everyone, regardless of tax bracket. The £500 figure that confuses people is the Personal Savings Allowance — a completely different thing that applies to savings interest, not self-employment income. The Personal Savings Allowance is £1,000 for basic-rate taxpayers, £500 for higher-rate, and £0 for additional-rate. The trading allowance has no income-based reduction.
What to do instead: Claim the full £1,000 trading allowance regardless of your tax bracket. If you’re a 40% taxpayer who skipped it because you thought it was £500, you’ve overpaid by £400 (£1,000 × 40%) — and you can amend your return to claim it.
Myth 2: “You can claim the trading allowance and actual expenses”
Background: Some people assume you can deduct the £1,000 allowance AND your actual expenses on top.
The reality: You can’t. It’s strictly either/or — you claim the trading allowance OR your actual expenses, never both. This is the single most important rule about the allowance, and getting it wrong means either leaving money on the table (claiming the allowance when your expenses are higher) or risking an HMRC correction (claiming both). The break-even point is exactly £1,000 in expenses: below that, the allowance wins; above that, actual expenses win.
What to do instead: Compare your total actual expenses against £1,000. Claim whichever is higher. Use our trading allowance calculator to compare both methods side by side.
Myth 3: “The trading allowance covers income from your employer”
Background: Some side-hustlers assume any extra income qualifies for the £1,000 allowance.
The reality: The trading allowance does not apply to income from your employer or your spouse’s employer. If your employer pays you for extra work “outside PAYE,” or your spouse’s company pays you for consultancy, you cannot claim the trading allowance against that income. You can only claim it against income from your own self-employment — freelance work, selling on Etsy, tutoring, and so on. According to HMRC’s guidance on tax-free allowances, the exclusion is explicit.
What to do instead: If the income came from an employer (yours or your spouse’s), claim actual expenses instead — the trading allowance isn’t available. If the income is from your own business, claim whichever is higher: the allowance or actual expenses.
Myth 4: “The trading allowance and the property allowance are the same thing”
Background: Both allowances are £1,000, both are flat-rate, and both are either/or with actual expenses. It’s easy to assume they’re one allowance.
The reality: They’re separate allowances for separate income types. The trading allowance applies to self-employment income. The property allowance applies to rental income. If you have both self-employment income and rental income, you can claim both — £1,000 against your trading income and £1,000 against your rental income. They don’t interfere with each other. The only thing they share is the £1,000 figure and the either/or rule with actual expenses.
What to do instead: If you have both types of income, claim both allowances. Don’t assume you’re limited to one £1,000 deduction across all your income.
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 help amending a return where you missed the allowance, see made a mistake on your Self Assessment. If you’re new to Self Assessment, our first-year self-employed checklist covers registration and filing basics. For the complete list of what you can and can’t claim as a sole trader, see our allowable expenses guide. For the full list of ways to lower your tax bill — expenses, capital allowances, pensions, Gift Aid and more — see our reduce your Self Assessment tax bill hub. If you’d rather have someone handle your return, compare accountants and filing services in our Self Assessment help section.
Trading Allowance vs Expenses Calculator
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Claim actual expenses — you'll pay £1,000 less tax. Your taxable profit drops to £24,000 vs £29,000 with the trading allowance.