The New Trading Allowance

The new £1,000 allowance for trading income is available from 6 April 2017. The aim of the trading allowance is to provide simplicity and certainty regarding income tax obligations on small amounts of trading and miscellaneous income from providing goods or services.

Although the concept of a £1,000 tax-free allowance sounds very simple, there are a number of complexities of which taxpayers need to be aware of.

At its simplest form, the trading allowance provides for a complete exemption from income tax if total trading and miscellaneous income in the year is less than £1,000. Not only is there no income tax to pay, but also no need to register with HMRC or file tax returns provided trading income is below this level and you have no other circumstances which would require you to register for self assessment.

The legislation allows for partial relief where the trading income exceeds £1,000. Individuals can choose to either:

• Deduct their actual business expenses from trading income in the usual way or
• Elect instead for the £1,000 trading allowance as a deduction from income

If you elect for partial relief and deduct the £1,000 from income you cannot deduct any other expenses. Individuals can decide on a year by year basis which approach to take. This will depend upon the type of business and the level of expenses incurred that year.

The trading allowance rules include some exclusions, in particular:

• The trading allowance cannot be claimed for partnership trades or for income which attracts rent a room relief.
• No relief will be available if an individual’s trading income includes any amounts received from:
• An employer, or spouse /civil partner’s employer
• A partnership in which they (or a connected party) are a partner; or
• A close company in which they (or an associate) are a participator.

For the purposes of the trading allowance, the income and profits of all an individual’s trades are combined. For example, if a decorator starts up a small business giving music lessons. Assuming the combined income from both trades exceeds £1,000 full relief will not be available for the new trade and if they were to claim partial relief they would not be able to claim for the expenses incurred in their decorating trade.

Although this in intended to be a tax simplification you can see from the above that it can be quite complicated. If you require assistance in connection with this or any other tax matter contact Kirsty MacDonald at Rennie Welch LLP either by email at kirsty.macdonald@renniewelch.co.uk or by telephone on 01573 224391.