If you earn money on the side, whether from selling on Vinted, freelancing, dog walking, tutoring, or renting out a parking space, you’ve probably come across the term “trading allowance” at some point. It’s one of the most useful, and most commonly misunderstood, parts of the UK tax system for anyone with a side hustle. This guide explains exactly what it is, how it works, and how to decide whether you need to register with HMRC at all.
This article is general information, not personal tax advice. Tax rules can change, so it’s always worth checking the current position on GOV.UK or speaking to an accountant if your situation is more complicated than the examples covered here.
What the Trading Allowance Actually Is
The trading allowance is a £1,000 tax-free exemption that applies to gross income from self-employment or casual trading activity. In plain terms, HMRC lets you treat the first £1,000 of this kind of income each tax year as if it simply doesn’t exist for tax purposes. It isn’t a deduction you subtract from a bill you’d otherwise owe. It removes that income from the calculation entirely, provided you qualify.
It was introduced back in April 2017 and the figure has stayed at £1,000 ever since, applying the same way in the 2025/26 and 2026/27 tax years.
What Counts as Trading Income
The trading allowance applies specifically to income from trading or providing a service, which covers a wide range of common side hustles, including:
- Selling goods you’ve made or bought specifically to resell, such as through Etsy, eBay, or Vinted
- Freelance work, such as writing, design, tutoring, or consulting
- Casual services like dog walking, gardening, or cleaning
- Hiring out personal equipment, such as power tools or a camera
- Renting out something like a driveway or parking space on a casual basis
It’s important to understand what it does not cover. The trading allowance does not apply to employment income from a normal job, since that’s taxed through PAYE separately. It also doesn’t apply to income from renting out property, which has its own, entirely separate £1,000 property allowance, or to dividends and savings interest, which are taxed under different rules again.
Trading vs Just Selling Your Own Stuff
One of the most common points of confusion is the difference between trading and simply clearing out things you already own. HMRC draws a clear line here, based on whether you’re buying or making things specifically with the intention of selling them for profit, as opposed to just getting rid of personal possessions you no longer want.
Selling your old clothes, books, or furniture that you originally bought for your own use, even if the total adds up to more than £1,000 over a year, generally isn’t considered trading at all, and normally falls outside Income Tax entirely. This is why clearing out your wardrobe on Vinted doesn’t automatically mean you owe tax, even on a busy year.
On the other hand, if you’re specifically sourcing items, from charity shops, clearance sales, or wholesalers, with the intention of reselling them for a profit, that is trading, and the trading allowance is the relevant relief that applies to it.
How the £1,000 Threshold Actually Works
This is the part that trips people up most often: the £1,000 threshold applies to your gross income, not your profit.
That means it’s based on the total amount you receive, before you subtract any costs like materials, postage, or platform fees. Someone earning £940 selling handmade items doesn’t need to register with HMRC at all, since they’re under the threshold. But someone earning £1,100 from the same kind of selling does need to register, even if they spent £300 on materials and their actual profit was only £800, because the £1,000 line is drawn on the income coming in, not what’s left after costs.
It’s also worth knowing that the £1,000 allowance is a single total, not £1,000 per side hustle or per platform. If you sell on Etsy and also do some freelance graphic design on the side, both income streams are added together against the same combined £1,000 limit, not treated as separate allowances.
What Happens If You’re Under £1,000
If your total gross trading income across everything you do stays at or below £1,000 in a tax year, and you meet the basic conditions, there’s usually nothing further you need to do. No registration with HMRC, no Self Assessment return required for that income specifically.
That said, it’s still worth keeping basic records of what you’ve earned, even if you don’t need to report it. HMRC can request evidence during a compliance check, and since January 2024, digital platforms including eBay, Vinted, Etsy, and Airbnb have been legally required to share seller earnings data directly with HMRC. This means HMRC often already has visibility of your platform-based income even if you never file anything, so having your own simple record to refer back to is a sensible habit rather than an unnecessary one.
What Happens If You Go Over £1,000
Once your gross trading income for the tax year goes above £1,000, you’re required to register for Self Assessment with HMRC. The deadline for this is 5 October following the end of the tax year in which you exceeded the threshold. For example, if you go over the limit during the 2025/26 tax year, which runs from 6 April 2025 to 5 April 2026, you need to register by 5 October 2026.
Once you’re registered and filing a Self Assessment return, you then have a choice between two different methods for calculating your taxable profit, and this is where the trading allowance becomes genuinely useful again even above the threshold.
Method one: use the £1,000 trading allowance as a flat deduction. Rather than claiming your actual expenses, you simply deduct £1,000 from your gross income and pay tax on whatever’s left. You cannot claim any additional expenses on top of this if you choose this method.
Method two: claim your actual expenses instead. You deduct whatever you genuinely spent running the activity, materials, postage, platform fees, and so on, and pay tax on the remaining profit.
You have to pick one method or the other for the tax year, not a mix of both, and it’s worth working out which one actually saves you more tax before deciding.
A Worked Example
Say you earn £2,200 in a tax year from part-time tutoring, and your actual costs, covering things like teaching materials and a subscription to a booking platform, come to £200.
- If you use the trading allowance, your taxable profit is £2,200 minus £1,000, which comes to £1,200
- If you claim your actual expenses instead, your taxable profit is £2,200 minus £200, which comes to £2,000
In this case, using the flat £1,000 allowance results in a lower taxable profit, £1,200 versus £2,000, so it’s the better option here, since it means you pay tax on a smaller amount.
The general rule of thumb is straightforward: if your actual expenses are less than £1,000, the flat trading allowance almost always works out better, since it lets you deduct more than you actually spent. If your genuine expenses are higher than £1,000, claiming the real figure is usually the more tax-efficient choice instead.
Does the Trading Allowance Affect National Insurance Too?
The trading allowance itself is about Income Tax, but self-employment can also involve National Insurance contributions once your profits reach certain thresholds. For the current tax year, self-employed individuals with profits above a set level are treated as having effectively paid Class 2 National Insurance without needing to make a separate payment, which protects things like your State Pension record. Below that profit level, you can choose to pay voluntary Class 2 contributions if you want to keep your National Insurance record up to date, even though it isn’t automatically required. This is a separate calculation from the trading allowance itself, so using the allowance doesn’t automatically determine what, if anything, you owe in National Insurance.
What If You’re Already Registered for Self Assessment for Another Reason?
If you’re already filing a Self Assessment return, for example because you also have rental income or you’re a company director, you can still apply the trading allowance against your side hustle income on the same return, choosing between the flat allowance or actual expenses just as described above, rather than being forced into one method because of your other income.
Common Mistakes People Make
Assuming the £1,000 limit is about profit, not gross income. This is the single most common misunderstanding, and it can lead people to assume they’re under the threshold when they’re actually over it, simply because they were thinking about what they kept rather than what they received in total.
Thinking the allowance applies separately to each side hustle. If you’re doing more than one thing, freelancing and reselling, for example, both incomes count toward the same combined £1,000 total, not two separate allowances.
Not registering on time after crossing the threshold. Missing the 5 October registration deadline can lead to penalties, so it’s worth registering as soon as you realise you’ve gone over £1,000 for the year, rather than waiting until the following January when your return is actually due.
Assuming platform income goes unnoticed. Since digital platforms now report seller data directly to HMRC, assuming smaller amounts of income simply won’t be seen is no longer a safe assumption, even below the registration threshold, since HMRC’s own records may already reflect what you’ve earned.
Changes on the Horizon
Tax rules around side hustles and reporting have been shifting fairly regularly in recent years, and there’s a proposed simplified reporting service intended to reduce paperwork for casual sellers and gig workers even when they’re above the current registration threshold, expected to apply from the 2027/28 tax year onward. As of the 2025/26 and 2026/27 tax years, the existing £1,000 registration threshold and process described in this guide remain the current rules, but it’s worth checking GOV.UK periodically if this area matters to you, since the details of any simplified system haven’t been fully finalised yet and could affect how registration works in future years.
Frequently Asked Questions
Does the trading allowance apply per person or per household? It applies per individual, not per household or per family. If two partners in the same household each run their own separate side activity, for example one sells crafts and the other does freelance photography, each person gets their own individual £1,000 allowance against their own gross income, rather than sharing a single combined allowance between them.
What if my side hustle makes a loss rather than a profit? If you want to claim a trading loss, you generally need to complete a full Self Assessment return using the actual expenses method rather than the flat trading allowance, since the flat allowance doesn’t allow you to record or carry forward a loss.
Do I need to register even if I’m confident I won’t owe any tax? If your gross income is over £1,000, you generally still need to register for Self Assessment by the 5 October deadline, even if your actual profit after expenses turns out to be very small or nil, since the £1,000 threshold that triggers registration is based on gross income rather than your final tax bill.
Can I use the trading allowance if I’m employed full time and this is just a small side project? Yes. The trading allowance applies to self-employment or trading income regardless of whether you also have a full-time job elsewhere. Your employment income is taxed separately through PAYE, and your side hustle income is assessed against the trading allowance independently.
What counts as evidence if HMRC asks about income I didn’t report because I was under £1,000? Basic records such as bank statements showing what you received, screenshots of sales from the relevant platform, or a simple spreadsheet logging what you earned and when are generally sufficient. The key is having something to show your total stayed under the threshold, rather than needing formal accounting.
Is the trading allowance the same as the Personal Allowance? No, these are separate. The Personal Allowance, currently £12,570, is the amount of total taxable income you can earn across all sources before paying Income Tax at all. The trading allowance is a distinct, separate relief that applies specifically to trading income, on top of whatever Personal Allowance you’re also entitled to.