Most people have heard about the trading allowance, and a lot of people think it is helpful. But it is often misunderstood and misused. Here I will unpick it a bit, talk about its positives, its negatives and hopefully clear up any questions you have about it.
What is it?
The Trading Allowance can seem like a wonderful thing if you have a side hustle, hobby business or second income. But it can lead to confusion or people being easily caught out. The trading allowance is perfect for people who resell a few vintage items found at their local charity shop or get paid by their next-door neighbour for picking up the shopping. It means that those odd little ‘extra’ incomes do not need to be declared to HMRC. If, however, you have a crafty side hustle, a newly launched small business, or you’re just starting out as a sole trader it’s really important that you understand how you can properly use the Trading Allowance, or even if you can use it at all.
You see, the Trading Allowance only allows an exemption for £1000 or less gross income. That means before expenses, before any deductions. And if you run lots of little businesses, this is across all of them. In order to break that threshold you only need to be making sales of £83.33 a month! If you are setting up a side hustle or hobby business, you can soon go above that figure without realising it. Also, not all income is eligible for the trading allowance so make sure that you check the HMRC website to ensure that it is something you can use before you claim it.
The other big thing to remember is that you must keep records of your income and expenses even if you are expecting to fall within the Trading Allowance exemption. So the Trading Allowance does not mean that you don’t need to be completing your accounts or starting a bookkeeping routine. After all, if you are not keeping records, how will you know if you are above or below the threshold for the Trading Allowance?
In short, the Trading Allowance is not something that should be taken lightly, it is not a ‘get out of jail (or bookkeeping!) free’ card, it is not an all-access pass to making a bit of extra cash. It is a system that enables people to start small businesses with fewer hurdles.
What should you do?
All people starting a side hustle, small business or sole trader role, should seriously consider registering for self-assessment tax. Do this even if you think you will be under the trading allowance. Then keep records either in an accounting ledger/book, a spreadsheet or using accounting software so that all of the income and expenditure is recorded. Once Self Assessment time rolls around have a look at your accounts, if you are under the £1000 gross threshold then you can tick the box on the self-assessment and not have to add in detailed information about your income and expenses. You can do this each year that it is relevant. If you find that you have gone over the allowance, then you submit your tax return and you will breathe a sigh of relief that you kept the records!
Of course, if you find yourself under the threshold, you could still file a self-assessment tax return. Why would you do that, you ask? Because it can lead to tax back. If you have made a loss in your accounts, you can offset this against your future profits. So as wonderful as the trading allowance is for simplifying tax returns for new businesses and sole traders, it could actually be more beneficial to you to file your return, and HMRC agrees.
Even if you are over the allowance, have a close look at your expenses. If your expenses are under £1000 but your income is over £1000, instead of putting in an exact expense figure, there is an option to use the trading allowance so you get the full £1000 allowance, even if your expenses are less than this.
Whatever the outcome, you will have kept on the right side of HMRC, started a good system and routine and have records to look at to explore your businesses’ future.
So there you have it a whistle-stop, but hopefully clear, tour of the Trading Allowance. If you have questions on this or anything else, then please book a free call.