‍There are two useful annual tax allowances for individuals who earn a small income from either a sole trade or from property. The allowances are for up to £1,000 each: one for trading income (sole trader), and one for income from a property business.

If you have both types of income, you’ll get a £1,000 allowance for each. The allowances aren’t available if you have such income from a private limited company. 

What does this mean for individuals?

The allowances mean that those with small amounts of income can simplify their personal tax arrangements in certain situations.

• If you have small amounts of income from work as a sole trader or a property business (including renting out car park spaces), you don’t need to report the first £1,000 of income on your Self Assessment tax return.
  

• If your income from trading or a property business is more than £1,000, the allowances can be used to reduce your taxable income. You can’t use the £1,000 allowance and, at the same time, claim tax relief for expenses. It’s one or the other. So you need to compare the amount of expenses you incur against the £1,000 allowance to see which is the most efficient for you.

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How to use tax-free allowances on property and income

Some examples of how to use the allowance, or whether to use it all, are shown below.

Example one - Trading income under £1,000

John earns £550 a year from being a self-employed handyman. As his income is less than the £1,000 allowance, he’ll be entitled to the full allowance and doesn’t need to include the income from this trading activity in his Self Assessment tax return.

Example two - Trading income over £1,000

Jess earns £1,550 a year from her self-employed photography business. She can use the full allowance to reduce her taxable income from this trading activity to £550 and includes the figure (£550) as income in her personal tax return.

Example three - Trading income - deciding whether to claim £1,000 or not

Lucy earns £20,000 a year from her self-employed film production business. If she uses the allowance, she can reduce her taxable income to £19,000.

However, Lucy also has expenses related to her business amounting to £5,000 and could use these to reduce her taxable income.

In this example, it’s not as tax efficient for Lucy to use the new allowance and she should continue to use her business expenses to reduce her taxable income.

Lucy includes £15,000 (income of £20,000 less expenses of £5,000) in her personal tax return.

With property tax income, those with a UK and overseas property business can choose how to allocate the allowance between the different businesses. However, using the allowances mustn’t create or increase a loss.

Example four - Property income - multiple properties

Geoff has an income of £1,500 from property A and £800 from property B. This results in a total of £2,300 in property income each year.

As his total income from property is more than the £1,000 allowance, Geoff can allocate £800 to property B and the remaining £200 to property A.

Geoff includes £1,300 (income of £2,300 minus the £1,000 allowance) in his Self Assessment tax return.

Exceptions to the rule

There are some exceptions where the allowances can’t be used, including:

• Trades carried out in partnership aren’t entitled to use the allowance, as HMRC want to avoid adding extra complexity to existing partnership rules
• Those who run ‘rent-a-room schemes’ won’t be entitled to claim the allowance as they’re not classed as relevant trades for the purposes of relief
• Shares gained from a Property Authorised Investment Fund or a Real Estate Investment Trust aren’t allowed under this scheme.

Making the most of your tax-free allowance

The tax-free allowances on property and trading income offer a straightforward and beneficial way for individuals with small incomes from sole trades or property businesses to simplify their tax arrangements. 

These allowances, each up to £1,000, can significantly reduce taxable income and ease the reporting burden for qualifying individuals. 

However, it is crucial to carefully evaluate whether to use the allowance or claim business expenses, as this decision can impact overall tax efficiency. Notably, these allowances are not applicable to income derived from private limited companies, partnerships, rent-a-room schemes, or certain investment funds. 

Appropriately leveraging these allowances enables individuals to better optimise their tax efficiency.

Dedicated accountancy support

As always, it’s best to get specific advice on your situation from a qualified accountant. If you don’t already have an accountant, why not speak to Crunch and see how we could help? Our simple software comes with built-in experts to help you save time and money while running your business.

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