Small traders with very modest incomes are currently eligible for a couple of very useful allowances. Both of these could save them money — and some paperwork:
1. Tax-Free Allowance for small traders
If you receive income of no more than £1000 per annum (before expenses) from property or trading income, you don’t need to tell HMRC, you don’t need to pay tax and usually you don’t need to do a self-assessment tax return. If you have both types of income and each earns you no more than £1000 gross per annum, you are usually eligible for the tax-free allowance in BOTH cases! There are exceptions, of course, but these are the general guidelines. Income from property or land speaks for itself, while ‘trading‘ would include things like self-employment, hiring out personal equipment or services like gardening, window cleaning or babysitting. Partnerships are not eligible.
2. Trading Income Allowance
If you are paying tax but have expenses below £1000 per annum, you could reduce the tax by claiming for ‘Trading Income Allowance’ instead of claiming for the actual expenses themselves. In effect, it’s like claiming for £1000 worth of expenses rather than the lower amount of expenses that you’ve incurred in reality. This aspect is all explained in greater detail, with a simple example, in our previous Trading Income Allowance article here.
It’s important to know, though, that you cannot claim both the tax-free allowance and the Trading Income Allowance. Also note that you will need to file tax returns if you want to claim any losses. You’ll also need to register for Self Assessment and file tax returns if you elected to pay Class 2 National Insurance Contributions on your trading income. (You would consider Class 2 NIC if you wanted to optimise your State pension entitlement and eligibility for other State Benefits).
Check your tax options with Taxfile
With all these scenarios, it’s important to check with us at Taxfile, just to ensure that everything has been taken into consideration. Call 020 8761 8000 or alternatively book an appointment with us here and we’ll be happy to talk it through with you or to run some figures for you.