The £1,000 trading allowance

Most individuals can earn up to £1,000 of gross trading income in a tax year without needing to tell HMRC about it, provided the trading allowance applies to their circumstances.

Gross income means the amount you receive before deducting any expenses.

For example, if you earn £900 from a small side business during the tax year, you may not need to register for Self Assessment simply because of that income.

However, if your gross trading income is more than £1,000, you will generally need to register for Self Assessment and declare the income to HMRC.

Is the £1,000 based on income or profit?

This is an important distinction.

The £1,000 threshold is based on income, not profit.

For example, suppose you sell handmade products and receive £1,500 from customers during the year, but spend £800 on materials.

Your profit may only be £700, but your gross trading income is £1,500. You have therefore exceeded the £1,000 threshold.

That doesn't necessarily mean you'll have tax to pay. It means you may need to report the income to HMRC.

Does this apply to Vinted, eBay and other online selling?

It depends on what you're doing.

Simply selling your own unwanted possessions doesn't normally mean you're running a business.

However, if you're regularly buying items with the intention of reselling them for a profit, making products to sell or otherwise operating commercially, you may be trading.

If you are trading, the same £1,000 gross income threshold can become relevant.

I've explained this in more detail in my article Do I Have to Pay Tax on Vinted Sales?

What happens if I earn more than £1,000?

If your gross trading income exceeds £1,000, you will generally need to register for Self Assessment.

When calculating your taxable profit, you may be able to choose between:

Claiming allowable business expenses – deducting the actual costs incurred in running your business

or

Using the £1,000 trading allowance – deducting the allowance instead of your actual business expenses.

You cannot normally claim both the £1,000 trading allowance and your actual expenses against the same trading income.

Which option is better will depend on your circumstances.

For example, if your allowable expenses are £2,500, claiming the actual expenses may be considerably more beneficial than using the £1,000 allowance.

Does earning more than £1,000 mean I'll pay tax?

Not necessarily.

Registering for Self Assessment and actually having tax to pay are two different things.

The amount of Income Tax and National Insurance you ultimately pay will depend on factors including your taxable profit and any other income you receive during the year.

Someone who is employed and starts a side business, for example, may have a different tax position from someone whose only income comes from self-employment.

What records should I keep?

Even if your income is currently below £1,000, it's sensible to keep records of what you earn.

If your business grows, good records will make it much easier to work out when you've crossed the threshold and calculate your income and expenses correctly.

If you become self-employed on a larger scale, keeping accurate records throughout the year will become increasingly important.

What about Making Tax Digital?

There is an important distinction between registering for Self Assessment and having to use Making Tax Digital for Income Tax.

MTD currently applies to qualifying sole traders and landlords with total gross self-employment and property income of more than £50,000, with the threshold reducing to more than £30,000 from April 2027 and more than £20,000 from April 2028.

So earning more than £1,000 doesn't automatically mean you'll have to submit quarterly MTD updates.

Do I need an accountant if I start a side business?

Not necessarily.

Many people with straightforward affairs are perfectly capable of keeping their own records and completing a Self Assessment tax return.

However, as your income grows, an accountant can help make sure you're claiming the expenses and allowances you're entitled to, meeting the relevant deadlines and keeping appropriate records.

Getting advice early can also be useful if you're unsure whether what you're doing actually counts as trading or whether you need to register with HMRC.

Need help with Self Assessment?

I help sole traders and small business owners in Rotherham and the surrounding areas with Self Assessment, bookkeeping and tax.

You'll deal directly with me throughout, so if you're unsure whether you need to register for Self Assessment or would simply prefer someone to take care of your tax return for you, please get in touch with Tunstall Accounting.