In an earlier article MSA looked at the tax implications of earning additional income from your side-business. While much of that still holds true, recent changes to the tax system have improved the situation for many.

Millions of Britons use online platforms such as Amazon, eBay, Etsy, and Airbnb to supplement their income, but few are aware of the tax liabilities for doing so.

In his Spring statement earlier this year, Chancellor Philip Hammond called for evidence on how these type of companies should help users pay the correct amount of tax. He then went one step further by introducing a new trading allowance.

The allowance is retrospective so applies from 6th April 2017 onwards. In the past HMRC should have to have been notified of every £1 of income you received. Whether that was from employment (usually sorted by your employer) or from other activities like like selling on Esty or renting out a room on AirBnB. As a result, most people earning small amounts just didn’t bother filling in a tax return, and HMRC did chase them. As always though, there were those abusing system, and this new regulation could be seen as the first step in cracking down on digital tax evaders.

What is the trading allowance and how much can I earn?

The new rules are part of efforts to support the digital and sharing economy, under which income generated from trading activities below £1,000 is tax free and does not need to be declared. The earnings don’t necessarily have to be from digital sources, but that is the particular mischief the allowance is trying to fix.

What if I earn more than £1,000?

If earning more than £1,000 HMRC will need to be notified by filing an annul tax return, but be careful as it could end up costing more than you bargained.

Earn just £1 over and above allowance and you could be liable for up to £200.20 of tax (at the basic rate). That’s because in order to claim the allowance you have tell HRMC in a process known as “making an election.” This doesn’t matter for earnings below £1,000 since HRMC aren’t going to notified anyway, but when earning over £1,000 it is important.

The trading allowance in action

Let’s say you have a £1,000 turnover from selling handmade goods on Etsy, and the cost to make those goods is £100. You enjoy a profit of £900, and because the total income is not more than £1,000 you don’t need to inform HMRC.

Now, if your turnover was £1,001, you would have to declare it to HMRC via a tax return. The default position of the tax office is to deduct expenses (which you’d list on your return too), and charge tax on any profit. In this example, that means you’d now be liable for tax on the whole £901 profit rather than just the £1 you earned over and above the allowance.

At the basic-rate of 20pc, the extra £1 you earned would create a tax liability of £180.20, compared to zero if you didn’t earn that extra pound, or just £0.20 if you’d ‘elected’ to use the trading allowance.

What should I watch out for?

There are a couple of things to watch out for. As shown above in the process of “making an election”, but there are others, particularly if you exceed the tax-free threshold.

  • It’s income that counts, not profits to keep an eye on how much your earning
  • You can either deduct the £1,000 trading allowance or your costs but not both
  • You don’t set a precedent i.e. if you decided to deduct the allowance this year – the next year you can choose to deduct your actual costs instead
  • The allowance is not available for partnerships so avoid involving others in your hobby if you wish to claim it
  • The £1,000 limit applies to all self employed trades and is not on a per business basis
  • There is a separate £1,000 property allowance, that can be claimed by individuals earning an income from their property, both this and the trading allowance can be claimed at the same time
  • The property allowance can only be claimed where “rent a room” relif (up to £7,500) has not been claimed.

14 Comments

  • Jordan grace

    So can I rent a room out in my house earn 7000 a year and not pay tax yes

    • Carl Michael

      Yes. This is direct from the Government website: “The Rent a Room Scheme lets you earn up to a threshold of £7,500 per year tax-free from letting out furnished accommodation in your home. The tax exemption is automatic if you earn less than £7,500. This means you do not need to do anything.

      If you earn more than this you must complete a tax return.”

      https://www.gov.uk/rent-room-in-your-home/the-rent-a-room-scheme

  • N. Mattis

    And what if I have a permanent paid job (PAYE) but earn less that £1000 per year with a a hobby. Does this mean I don’t have to register as a sole trader and fill out a tax return?

    • Carl Michael

      Our understanding is that if your self employed income is £1,000 or less you do not need to tell HMRC or file a tax return. That makes it nice and simply for people earning a small income from a hobby, or just testing new ideas. Good luck.

  • Caroline Thom

    Hello, can you earn upto £1000 per year ? I’m just researching about this.

    • Carl Michael

      Yes up to £1000 tax free and without having to fill out a tax return. If you go over though you would need to fill out a self assessment form.

  • hannah

    I am currently working for the NHS as nurse and pay my current taxes each month out of my pay slip.

    Throughout this winter I will be doing some evening work being a waitress at dinner parties. From what I have worked out I shall be earning around 1500 extra this winter from it.
    After reading the information above I just need some clarification on what I need to do about registering with hmrc an so forth.

  • Julia

    Thanks, this is really helpful. I have a question about the combination of side hustle and PAYE. If my side hustle earns more than the trading allowance of £1000 I understand I need to register as a sole trader and do self assessment. Because it is a side hustle, I’m already paying tax through the PAYE system. Do I then need to come off PAYE entirely and do everything self assessed or can you do both together and just self assess the side hustle income? Thanks for your help 🙂

    • Carl Michael

      Hi Julia, if you are being paid through PAYE for your main job, and your ‘side-hustle’ earns more than £1000 thus requiring you to register with HMRC, you will still stay on PAYE for your main job, but now also have to fill out a tax return. The tax return will have a section for you to fill in about your main job so you won’t be taxed twice.

    • Raymond McNeill

      Hi,
      I am 66 years old and retired and am in receipt of occupational pension and state pension.
      Over the years I collected £100 notes. I have sold a few on ebay.
      My question is this? Is the trading allowance iro the note value and the profit I make or is it iro only the profit I make on the collectors banknote? Example £100 note sells for £155.85 incl postage (before eBay’s fees). What is considered trading allowance amount?

      • Carl Michael

        This is something that is likely to come under capital gains. It gets more complicated with coins and bank notes depending on whether they are still legal tender or not. Your best bet in this case would be to call HMRC and ask them directly as this is a specialist area.

  • Sally Molyneux

    Hi, I have a main full time job and for that I am registered to the PAYE system.
    However I did a one-off day of consultancy work and earned less than £1000. Does this scheme mean that I do not have to declare this one-off payment?

    • Carl Michael

      That’s correct. There is nothing to declare, and no need to register. If you were to earn more than the £1,000 you would need to both register as a business, and complete a self assessment form.

      If you have to complete a self assessment for any other reason then you would need to include this income on the assessment, and make a choice as to whether to use the trading allowance or not.

  • Melanie

    I’m a bit confused on this statement. “Now, if your turnover was £1,001, you would have to declare it to HMRC via a tax return. The default position of the tax office is to deduct expenses (which you’d list on your return too), and charge tax on any profit. In this example, that means you’d now be liable for tax on the whole £901 profit rather than just the £1 you earned over and above the allowance.” As far as I’m aware, in the UK, there is a personal allowance of around £12,000 and if you earn less than that you don’t pay tax. I know you have to declare it but I don’t think you’d be charged tax on the £901 because you don’t pay tax if your earnings are less than £12000. Please can you clarify this.

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