Using the Trading Allowance in 2025/26: When the £1,000 Tax-Free Limit Applies
With more people earning money outside traditional employment — through side projects, online platforms, casual freelancing, or hobby income — questions around tax and small amounts of trading income are becoming increasingly common.
To simplify matters, the UK tax system includes a Trading Allowance, which allows individuals to earn up to £1,000 per tax year tax-free from trading income.
For the 2025/26 tax year, the Trading Allowance remains at £1,000, offering a straightforward way for people with modest trading income to avoid unnecessary tax reporting — provided they meet the conditions.
In this post, we explain how the Trading Allowance works, who can use it, what counts as trading income, when it applies automatically, and when it may be better to opt out and declare actual profits instead.
What Is the Trading Allowance?
The Trading Allowance is a tax exemption that allows individuals to earn up to £1,000 per tax year from trading income without paying tax on it.
Key features:
- The allowance is £1,000 per individual, per tax year
- It applies to gross trading income, not profit
- It covers a wide range of small or casual trading activities
- You can either use the allowance instead of claiming expenses, or opt out and claim actual expenses
- You do not need to register as self-employed if your income is fully covered by the allowance
The allowance is designed to reduce administrative burden for people earning relatively small amounts from trading activities.
What Counts as Trading Income?
Trading income generally includes money earned from selling goods or services where there is an element of activity, repetition, or intention to make a profit.
Common examples include:
- Freelance or consultancy work
- Tutoring or coaching
- Selling handmade items or digital products
- Online selling (eBay, Etsy, Vinted, etc.)
- Content creation income (where treated as trading)
- Casual service work alongside employment
The allowance is aimed at trading, not employment. PAYE income from a job does not count.
Who Can Use the Trading Allowance?
You can use the Trading Allowance if:
- You are an individual (not a company or partnership)
- You receive trading income during the tax year
- Your gross trading income is £1,000 or less, or only slightly above
- You are happy to use the flat allowance instead of claiming expenses
It is particularly useful for people who:
- Earn occasional or irregular income
- Have a side activity alongside employment
- Are testing a business idea before committing fully
- Have minimal expenses
What Doesn’t Qualify?
The Trading Allowance does not apply to:
- Employment income taxed through PAYE
- Income from a limited company
- Partnership income
- Property income (covered separately by the Property Allowance or Rent-a-Room Scheme)
- Income where the activity is clearly a hobby with no commercial intent (though this has separate rules)
It also cannot be used in addition to expenses — it is one or the other.
How the £1,000 Limit Works
The £1,000 allowance applies to total gross trading income, before deducting any costs.
If your trading income is £1,000 or less, the income is fully covered by the allowance.
If your income is over £1,000, you have two options:
-
Use the Trading Allowance and pay tax on the excess
-
Opt out of the allowance and calculate your profit in the normal way (income minus allowable expenses)
You must choose one method for the tax year.
Example 1: Income Below the Allowance
You earn £800 during the year from freelance design work alongside your job.
- Gross trading income: £800
- Income is below £1,000
- No tax is due on this income
- You do not need to register for Self Assessment solely because of this income
Result: The income is fully covered by the Trading Allowance.
Example 2: Income Above the Allowance — Use the Allowance
You earn £1,400 from tutoring.
- Gross income: £1,400
- You choose to use the Trading Allowance
- Taxable income: £1,400 – £1,000 = £400
- You do not claim expenses
This approach is often simpler where expenses are minimal.
Example 3: Income Above the Allowance — Opt Out
You earn £1,400 from tutoring, but your expenses total £700 (travel, materials, software).
If you opt out of the allowance:
- Income: £1,400
- Expenses: £700
- Taxable profit: £700
This is lower than the £400 taxable amount in Example 2?
No — £700 is higher than £400.
So in this case, using the allowance is better.
If your expenses had been £900, opting out would give:
- Taxable profit: £500
At that point, opting out may be more beneficial.
Key point: you should compare £1,000 allowance vs actual expenses, and choose the lower taxable figure.
Do You Need to Register for Self Assessment?
This is where the Trading Allowance is particularly helpful.
- If your gross trading income is £1,000 or less, and you have no other reason to file a tax return, you do not need to register for Self Assessment
- If your income is over £1,000, you usually need to register and declare it, even if you use the allowance
If you already complete a tax return for other reasons, you still need to include the income and indicate that you are using the Trading Allowance.
Can You Use the Trading Allowance With Other Allowances?
Yes — but with limits.
You can use:
- The Trading Allowance for trading income
- The Property Allowance for small amounts of property income
- The Rent-a-Room Scheme for furnished rooms in your main home
However, each applies to different types of income, and the rules are separate. You cannot apply the Trading Allowance to property income or vice versa.
When the Trading Allowance Is Most Useful
The allowance is particularly effective when:
- Trading income is modest
- Expenses are low
- You want to keep things simple
- You are not ready to operate as a full business
- You want to avoid unnecessary admin
It is less helpful when:
- Expenses are high
- You are operating on a larger or growing scale
- You want clearer visibility of business performance
Common Misunderstandings
Some frequent areas of confusion include:
- Thinking the allowance applies to profit rather than income
- Assuming it can be used on top of expenses
- Believing it applies automatically even when income is over £1,000
- Confusing it with the Property Allowance
Understanding these distinctions avoids errors and unexpected tax bills.
Summary
For the 2025/26 tax year, the Trading Allowance remains a simple and generous relief for individuals earning small amounts from trading activities.
You should consider using it if:
- Your trading income is under or just above £1,000
- Your expenses are minimal
- You want a straightforward tax position
You may want to opt out if:
- Your expenses exceed £1,000
- You are operating more like a full business
- You want to understand true profitability
Used correctly, the Trading Allowance can remove unnecessary complexity and ensure small amounts of income are dealt with efficiently and correctly.
If you’re unsure whether the Trading Allowance applies to your situation, or whether it’s better to use the allowance or claim actual expenses, a short review can usually provide clarity. You can book a free 30-minute call to talk through your income, understand your options, and make sure you’re approaching things in the most appropriate way for your circumstances.
