How Does the Trading Allowance Work?
If your total side hustle income is £1,000 or less in a tax year, you don’t need to report it to HMRC. You won’t pay any tax on this income either. Once your income exceeds £1,000, you’ll need to register for Self Assessment and submit a tax return. This is where you’ll declare your earnings.
When completing your tax return, you have two options. You can either deduct the £1,000 allowance from your income or claim your actual business expenses. Allowable expenses can be deducted from your income to reduce your taxable trading income, which may result in a lower tax bill.
Claiming allowable expenses provides tax relief by reducing the amount of income you pay tax on. However, if you claim the trading allowance, you cannot claim tax relief on allowable expenses, you must choose one or the other.
You must choose whichever gives you the better result, but you can’t do both. It’s one or the other, so calculate carefully. Some self-employed individuals may use the cash basis accounting method, which affects how income and expenses are reported on your tax return.
