Trading Allowance: The £1,000 Tax-Free Side-Income Rule

You sold a few things on Vinted, did a bit of freelance work, or picked up brand deals on TikTok, and now you're wondering whether HMRC wants to hear about it. The good news is that the first £1,000 of certain side income can be completely tax-free, and in many cases you don't even need to file a tax return for it.

That £1,000 is called the trading allowance. It sounds simple, and often it is, but the detail of when it covers you, when it doesn't, and when claiming it actually costs you money is where people slip up.

This guide explains who the trading allowance is for, how full and partial relief work, when you have to register for Self Assessment, and how to decide between the allowance and your actual expenses. It's written for sole traders, casual earners, and creators with a side hustle. The figures are for the 2025/26 tax year.

What is the trading allowance?

The trading allowance is a tax exemption of up to £1,000 a year on certain types of income. If your gross income from those sources is £1,000 or less in a tax year, that income is tax-free and you usually don't need to tell HMRC about it at all.

It was introduced to take small, casual earners out of the tax system entirely, so that a bit of dog-walking money or the odd freelance invoice doesn't drag you into filing a return.

It is separate from your personal allowance, which is the amount of income you can earn before paying income tax at all. For 2025/26 the personal allowance is £12,570. The trading allowance sits on top of that, specifically for the trading income it covers.

One important word here is "gross". HMRC defines gross income as the total amount you would put on your tax return before any allowances or expenses are taken off. So the £1,000 test looks at what you took in, not your profit after costs.

What income does the £1,000 allowance cover?

The trading allowance applies to:

• Self-employment income (freelancing, a sole trader business, a side hustle).
• Casual or one-off services, such as babysitting, gardening, or odd jobs.
• Income from hiring out personal equipment, for example renting out tools or a camera.

That covers most of the modern side-income world. If you sell handmade goods, take on freelance gigs, or earn from content and brand deals, this is the allowance that applies to your trading income.

Selling your own unwanted personal belongings, the clear-out type of Vinted or eBay selling, is usually not trading at all, so no tax arises and the allowance doesn't even come into play. It's when you start buying or making things to sell at a profit, regularly, that you're trading and the allowance becomes relevant. If you're a sole trader building something more than a clear-out, that distinction matters.

There's also a separate £1,000 property allowance for income from property. It works the same way but applies to property income. If you have both types of income, you get a £1,000 allowance for each.

What is full relief and when do I avoid a tax return?

Full relief is the simple end of the rule. If your annual gross trading income is £1,000 or less, the income is fully covered and you may not have to tell HMRC about it or complete a Self Assessment tax return.

So if you made, say, £700 from a weekend freelance project across the whole tax year and that was your only trading income, the trading allowance wipes it out. No tax, no return (unless you need to register for another reason, which we cover below).

This is automatic in the sense that you don't apply for it. The allowance is built into the rules. You just need to be confident your gross figure is genuinely £1,000 or less for the year.

What is partial relief and how does it work?

Once your gross trading income goes above £1,000, you're into partial relief, and you now have a choice to make.

You can deduct the £1,000 allowance from your gross income instead of deducting your actual business expenses. You can deduct up to £1,000, but not more than the amount of your income, and if you claim the allowance you cannot also deduct your real expenses or other allowances. It's one or the other.

In plain terms, partial relief gives you two ways to work out your taxable profit:

You pick whichever leaves you with the lower taxable profit. You can't mix the two in the same trade.

Should I claim the trading allowance or my expenses?

The decision comes down to one question: are your allowable expenses more or less than £1,000?

• If your real costs are below £1,000, claim the trading allowance. You get to deduct a flat £1,000 even though you spent less, which lowers your taxable profit.
• If your real costs are above £1,000, claim your actual expenses instead. The allowance would short-change you.

A quick way to sanity-check the maths is to run both versions through our self-employed tax calculator and compare the tax due. For a small side hustle with low costs, the allowance usually wins; for a more established trade with stock, mileage, or kit to buy, actual expenses usually win.

One more point: the allowance can reduce your taxable income to nil, but it can't be used to create or increase a loss. You can only deduct up to the amount of your income.

Illustrative example: Maya the Vinted seller

Illustrative example. Maya buys vintage clothing in bulk and resells it on Vinted as a side business. This is trading, not a personal clear-out, because she's buying to sell at a profit. In 2025/26 her figures are:

• Gross sales: £3,000
• Actual allowable expenses (stock, packaging, fees): £400

Because she's a Vinted seller who is clearly trading and her gross income is over £1,000, she's into partial relief and has a choice.

Option A, claim the trading allowance:

• £3,000 gross income minus £1,000 trading allowance = £2,000 taxable profit.

Option B, claim actual expenses:

• £3,000 gross income minus £400 expenses = £2,600 taxable profit.

The trading allowance leaves Maya with £600 less taxable profit, so Option A wins. Her costs were under £1,000, so the flat allowance beats her real expenses.

Whether Maya actually pays any tax then depends on her other income. The trading allowance settles her trading figure at £2,000 of profit; that £2,000 is added to the rest of her income for the year and taxed in the normal way, after her £12,570 personal allowance and at the basic rate of 20% on income above it. If Maya had a full-time job already using up her personal allowance, the £2,000 would be taxed at 20% (£400 of income tax), plus Class 4 National Insurance at 6% on the slice of profit above the £12,570 lower profits limit if her total profits cross it.

The number to take away is the £600 saving from picking the right method, not a fixed tax bill, because the bill depends entirely on everything else she earns.

When must I register for Self Assessment?

If your gross trading income for a tax year is more than £1,000, you need to register for Self Assessment. The deadline to register is 5 October following the end of the tax year. For 2025/26 income, that's 5 October 2026.

You file the return online by midnight on 31 January following the tax year, and any tax due is payable by the same date.

Even if your gross income is £1,000 or less, you might still need to register and file for another reason, including when you:

• Want to claim a loss to set against other income.
• Want to pay voluntary Class 2 National Insurance to protect your benefit and state pension record.
• Need a Self Assessment return to claim Tax-Free Childcare or Maternity Allowance.

If you're not sure whether you've crossed the line, our Self Assessment service can check your position and handle the registration and return for you.

What are the restrictions on the trading allowance?

The trading allowance is generous, but it doesn't apply to everything. You can't use it against:

• Income from a partnership.
• Income from a company that you, or someone connected to you, owns or controls.
• Income from your employer, or from the employer of your spouse or civil partner.

These rules stop people from converting salary or close-company income into tax-free "trading" income. If your side income is genuinely from third parties, you're fine.

Also remember the trade-off built into partial relief: claim the allowance and you give up the right to deduct your actual expenses for that trade. For a creator or seller investing in stock, equipment, or content production costs, that can make actual expenses the better route. Always compare before you choose.

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