The Trading Allowance: The Easy Tax Break No One's Using
22nd April 2020
It’s hard to believe when you’re filling in the yearly forms, but the taxman really isn’t trying to make Self Assessment difficult for you. Yes, the rules and systems seem to change every year – not to mention all the rates and thresholds you have to keep track of. Even so, the point of the Self Assessment scheme is to get your tax sorted out with the least fuss possible. The trouble is, HMRC doesn’t always do a great job of getting that message out, or talking people through their best options.
One of the best examples of this right now is a little tax allowance that, statistically speaking, you’ve probably never even heard of. Under the Trading Allowance rules, self-employed people operating as Sole Traders can basically set aside half the numbers they’ve been crunching each year. Instead of claiming tax relief for all those essential expenses and outgoings, you can simply claim a flat-rate Trading Allowance of £1,000.
Flat-rate deductions aren’t a completely new idea, of course. If you’ve filed tax returns as a Sole Trader before, you’ve probably already checked out HMRC’s “simplified expenses” scheme. Under simplified expenses, you can claim flat rates for things like business costs for vehicles, working from home or living in your business premises. The rates for these are decided by the taxman, meaning they might be quite different from your actual expenses. If you’re looking to lighten your tax workload, though, they can be a great option.
The Trading Allowance, however, kicks this concept up a notch. Instead of precisely reporting the hours you’ve spent working from home or the business mileage you’ve done, you just claim the flat £1,000 deduction against your taxable profits. It’s simple, efficient and – if your actual expenses are under £1,000 - it works out pretty well for you. Also, if you’re bringing in under £1,000 a year of self-employment income, you don’t have a penny of tax to pay on it at all.
Furthermore, if you’re also earning extra cash by renting out some property, there’s a separate £1,000 allowance for that as well. Yes, if you’ve got money coming in from both rent and self-employment, you can claim both allowances. Keep in mind that using the Trading Allowance replaces both simplified expenses and the standard way of claiming your work costs against those profits. In other words, you can’t play pick ‘n’ mix with the systems. Even if you do go for the Trading Allowance, you should be keeping track of your expenses anyway. There are other reasons you might need those records later, even if they’re not part of your Self Assessment tax return.
According to HMRC figures from 2019, only a small fraction of Sole Traders who stand to pay less tax by claiming the Trading Allowance are actually doing it. That’s a real shame – and not just because of the wasted money. The mad scramble for receipts and records is a huge headache for so many people when the Self Assessment deadline’s looming. Anything that takes the pain out of Self Assessment can only be good news.
The faster and wider word gets out about this allowance the better - so remember to give it some thought if your yearly business expenses are pretty low. While you’re at it, keep coming to RIFT with all your tax questions and problems. If you’re not sure of your footing, you can always trust the UK’s leading tax experts to set you on the right path.
RIFT are the UK's leading tax rebate and tax return experts who've been in the business since 1999. Need to file a tax return? Use our tax return calculator to get a quote for our tax return service. Want information on other personal allowances? Check our marriage tax break guide.