The trading allowance is an allowance that applies to individuals (not those in a partnership), that exempts £1000 of gross income from National Insurance or Income tax. This is applied to your income before any expenses are deducted.
The exemption is automatic and if your self-employed income is £1,000 or less, you do not need to tell HMRC or file a tax return.
For example, if you have a small gardening business and your income for the year is £900, this is covered by Trading Allowance and you will not need to pay tax on it or report this to HMRC.
Trading allowance vs business expenses
You can claim the higher of the trading allowance of £1000 or business expenses, you cannot claim both.
So, if your income is £6000 and your expenses are £500, you can either claim your expenses or the trading allowance. In this case, if you claim expenses(£6000-£500) then your taxable profits would be £5,500, but if you claimed the trading allowance instead (£6000-£1000) your taxable profit would be £5000.
Class 2 NIC and business losses
If you wish to pay class 2 NIC on your trading income, it is necessary to register for self-assessment and file tax returns. You can read more about class 2 NIC here.
It is also necessary to register if you wish to claim losses.
If you have a trading income of £700 but business expenses of £900 there is a loss of £200.
In this case, your income is below the trading allowance threshold of £1000, so you do not need to report this income. But, if you wish to claim the loss then you will need to complete a tax return.
