The £1,000 trading allowance

What it actually is

The trading allowance lets you deduct a flat £1,000 from your trading income instead of your actual expenses. That word instead is the whole lesson. It is an alternative to claiming expenses, not something you get on top of them.

Two ways to work out the same profit

Once your income is over £1,000 you choose, each year, whichever method leaves you with the lower taxable profit.

Income                          £4,000
Actual expenses                   £300

Method A: actual expenses    4,000 - 300   = £3,700 taxable
Method B: trading allowance  4,000 - 1,000 = £3,000 taxable  <-- better

Income                          £4,000
Actual expenses                 £2,600

Method A: actual expenses    4,000 - 2,600 = £1,400 taxable  <-- better
Method B: trading allowance  4,000 - 1,000 = £3,000 taxable

The rule of thumb is simple: if your real expenses come to less than £1,000, take the allowance. If they come to more, claim the expenses and forget the allowance exists.

Where it gets misused

The bit HMRC does not spell out

Choosing the allowance in a loss-making year can cost you. If your expenses genuinely exceed your income, claiming real expenses produces a loss, and losses can often be carried forward against future profits from the same trade. Take the flat £1,000 instead and you have simply thrown that loss away.

This matters most in year one, which is exactly when expenses are highest and income is lowest. A new trader with £900 of income and £2,400 of setup costs who takes the allowance out of habit has quietly discarded a £1,500 loss they could have used against next year's profit.

Common mistakes

• Stacking it on top of expenses. The most common error, and it overstates your relief.
• Claiming it for every separate side gig. One allowance, across all of them.
• Using it in a loss year without checking. You may be discarding a usable loss.
• Confusing it with the £1,000 property allowance. They are separate allowances for separate income types.