What is the trading allowance?

Are you looking to maximise your earnings from your new business? Find out more about what the UK trading allowance means for you in this article.

We’ll cover the key elements of what you need to know about how your trading allowance impacts your business, including:

• What is a trading allowance?
• How do the trading and personal allowances differ?
• What does it mean for your taxes?
• How do you claim your trading allowance?
• When are you not allowed to claim the allowance?
• How does Making Tax Digital impact your trading allowance?
• How can you keep track of your business’ profits with Countingup?

Venturing into the world of business comes with a need to know basic financial and tax terms. Read on to find out more about the trading allowance available to you as you launch a new business and how you can use it best.

Trading allowances have been available to sole traders since 2017 and are in place to help new entrepreneurs set up their businesses without having to declare income to HMRC. Similar to other business allowances, this is only up to a certain threshold.

Sole traders can earn an annual total of up to £1,000 in gross profits before they must declare their self-employed income and file tax returns through Self Assessment. Gross profit is the money you make before accounting for the running costs your business faces, like travel, electricity, etc. (find out more about the differences in profit types here). 

Trading allowances are only available to sole traders – not partnerships or limited companies.

Therefore, if you’re a sole trader earning a gross value just below or just above this value, you’ll need to know what this means for your taxes and income. Notably, sole traders can have multiple businesses and still claim this allowance, as long as their total personal gross income is below this amount.

The trading and personal allowances differ in their value and what they mean for sole traders. The personal allowance is currently calculated at £12,570 – much higher than the trading allowance. Above the personal allowance threshold, individuals pay income tax on top of national insurance contributions. 

Therefore, if all you earn from your business is within your trading allowance, neither of these will affect you.

Yes, the trading allowance is only a threshold for how much you can earn from your business’ annual gross profits before you must register as a sole trader with HMRC and declare your income. Registering to declare income below this threshold doesn’t change anything – you’re still entitled to claim it as tax-free. 

If you make a loss, you can register and claim tax relief on future years’ trading. Therefore, there are circumstances where declaring your income, even if you earn below your tax-free trading allowance, is advantageous for your business.

If you have a gross income of below £1,000 and plan on claiming your trading allowance, HMRC requires you to keep records of your business’ income and expenses. These include invoices and receipts your business receives, as well as copies of those you issue to customers. As long as your gross income is below this level, you don’t have to file tax returns. If you’ve registered for Self Assessment before, you can claim the full amount when submitting your return as long as your income is below the same threshold.

When claiming, you’re not allowed to deduct more than the trading allowance – the maximum you can claim is fixed at the full allowance itself. 

Making Tax Digital (MTD) is a new initiative launched by HMRC set to begin from April 2023. From this date, HMRC will require sole traders to keep digital records of their business and trading if they make above £10,000 annually. This is done using mobile accounting apps like Countingup. 

As you scale up your business and begin to earn above £10,000 each year, you’ll need to have a digital record of your business’ trading in order to submit tax returns. However, Countingup also makes your business’ accounting easy even if you’re only currently making your trading allowance.

While your annual gross income might be below the threshold for MTD currently, digital accounting practices provide key performance advantages for businesses of all sizes, regardless of annual turnover. 

As a small business owner, you stand to save time from your financial admin and gain a better understanding of your business’ performance. All this while being legally prepared for when your business grows past the MTD threshold by using apps like Countingup.

Countingup provides MTD-compatible accounting software and a business current account in one app. To save you time, you’ll get automated invoicing features, expense reminders, a receipt capture tool and more. It means you can keep your financial records accurate and up to date – even while on the go.

Countingup also offers real-time profit and loss reporting and tax estimates while trading. You can get near-instant updates about your business’ success and trust your tax liability is sorted when the time comes to file, whether you opt for your annual trading allowance or not.

Find out more here and sign up for free today.