Tax-free trading allowance for self-employed

As self-employed or a freelancer in the UK, you can take advantage of the trading allowance, which allows you to earn up to £1,000 tax-free income. 

This guide explains the types of income that fall under this law and how to claim the allowance. We’ve also outlined how expenses and multiple sources of income may affect your it.

How the HMRC trading allowance works

Generally, self-employment income is subject to tax and National Insurance contributions (just like other income types). However, HMRC offers a trading allowance exemption (sometimes referred to as “hobby allowance”), which allows you to earn your first £1,000 tax-free on jobs like: 

• Self-employment
• Casual jobs, such as babysitting, tutoring, or dog-walking
• Side hustles, like selling items online or engaging in the gig economy online

Mileage tracking made easy

Trusted by millions of drivers

Automate your mileage log Automate your mileage log

Claim your deductions

Reclaim your time

Automatic mileage tracking and HMRC-compliant reporting.

Get started for free Get started for free

How and when to claim

If you earn £1,000 or less from your self-employment, there’s no need to submit a formal claim to HMRC. That means you may not need to register for Self Assessment to declare that income.

You can also claim the trading allowance regardless of when you start trading — meaning you don’t need to operate your business for a whole tax year to claim the total allowance.

Partial relief (income over £1,000)

Once your self-employment annual earnings exceed £1,000, HMRC lets you claim partial relief, meaning you can subtract the allowance from your taxable gross income. 

For instance, if you earn £3,000, only £2,000 would be taxable. Keep in mind, in this case you won’t be able to claim otherwise allowable expenses on top. 

Do I need to file a tax return when claiming the allowance?

If you earn £1,000 or less, you generally don’t need to register as self-employed or submit a Self Assessment tax return. But there are some exceptions.

You may still need to file a tax return if you owe tax on other sources — such as the state pension, foreign income, or capital gains. However, you don’t have to declare self-employed income under £1000 on your return.

If you’re claiming partial relief, you do need to submit a tax return. In this case, you will enter the trading allowance in box 10.1 of the self-employment (short) tax form.

Keeping records

Even if you don’t need to file a tax return, you should keep a record of your trading income and business expenses to help you navigate future tax returns and claims.

Those may include:

• Invoices sent to customers or clients
• Bank statements showing sales and payments
• Receipts or invoices for business expenses 
• Amounts taken out of a bank account for business use
• Amounts transferred between business and personal accounts
• Journey details and mileage travelled for business trips

Many people use accounting software to help, but you can also create your own spreadsheet.

A mileage tracking app that generates HMRC-compliant mileage reports for you can be a great addition to more automated, streamlined record-keeping. However, if you have other types of business expenses than mileage (e.g., software or equipment), don’t forget to track them too.

Claiming expenses on tax-free trading allowance

The trading allowance is applied to your gross trading income (income before deducting expenses). As a result, you can’t deduct expenses and use your trading allowance — you must choose one or the other.

Sometimes, claiming expenses makes more sense than using the trading allowance. We’ve included an example below to demonstrate this. To learn more, you can check out our guide to claiming expenses as self-employed.

Example: claiming expenses instead of the deduction

Let’s say you’ve just embarked on the self-employment journey as a delivery driver in the UK, and you’re unsure whether to claim expenses on your income, or claim partial relief through the trading allowance.

In this example, your gross income was £2,500 for the past tax year. You also had business expenses of £1,200, mainly from business driving costs accrued.

If you claimed partial relief, you’d reduce the amount you pay tax on by £1,000, leaving you with a taxable income of £1,500.

Meanwhile, if you opted to claim expenses, you’d be able to deduct £1,200, leaving you with a taxable income of £1,300. 

You’d therefore save more money by NOT using the trading allowance deduction.

Applying the trading allowance to make a business loss

You can’t use the HMRC trading allowance to make a loss — you can only claim as much as you make. For example, if you have a self-employment income of £500, you can only deduct up to £500.

If your business expenses are higher than your income, it’s better to claim expenses through a tax return instead, as this method allows you to make a loss.

How to claim tax allowance with more than one income source

If you have multiple sources of self-employment income, you can’t use the trading allowance more than once. 

Likewise, you can’t use the allowance for one income source and claim expenses for the others. 

Instead, you have two choices:

• Use the full allowance on one source of income and claim no expenses on the other income sources, or
• Claim expenses on all income sources instead of using the trading allowance.

However, you can combine your trading allowance with other allowance types. HMRC offers a £1,000 tax-free allowance on property income, which you can claim alongside your trading allowance.

You can also combine your trading allowance with the standard personal allowance of £12,570 (for the tax year from 6 April 2024 to 5 April 2025).

Potential misuse of the allowance

If you have made a mistake or changed your mind about whether to claim the allowance, don’t panic.

For instance, you may have believed you could use a separate trading allowance for each business you run, but have now realised this isn’t the case and decided to claim expenses instead. In this case, simply register as self-employed with HMRC and complete a tax return. 

Note that this may result in penalties if you have missed the tax deadline of 31st January. 

If you have already completed a tax return, you can update it. You may wish to do this if you unnecessarily included self-employment income below £1,000 on a Self Assessment return filed for another purpose (e.g. foreign income).

FAQ