Earning money tax free - the self-employed trading and property income allowances
How you can earn £1,000 tax free each year - self-employment and property income
HMRC allow you to earn a small amount from self-employment and/or property before you need to declare it and pay tax on it.
This tax exemption means you can effectively earn something tax-free. It's good if you have a small amount of self-employment or property income.
For self-employment it's called the trading allowance.
For property it's called a property allowance (some people refer to it as the income allowance).
untied claims this automatically if it makes sense to do so
If your expenses are more than £1,000 - including mileage - then we apply the actual expenses. If your expenses are under £1,000 then we claim the trading allowance for you, and similarly for the property allowance.
How the self-employment trading allowance works
For self-employment, you get a trading allowance of £1,000. If you earn £1,000 or less this does not need to go on your tax return. But if you earn more than £1,000 then you'll have to pay tax on your profit. To work this out you have a choice - you can either claim the trading allowance of £1,000 or the actual expenses you incur. And of course you'll want to claim higher amount of expenses in order to reduce the profit you're paying tax on.
How the property allowance works
For property, you get a property income allowance - also of £1,000. If your rental income is no more than £1,000 this does not need to go on your tax return.
But if your income is above £1,000 then this needs to go on your tax return. Once again you have a choice - you can either claim the income allowance of £1,000 or the actual expenses you incur.
And once again untied does this for you. If your expenses are more than £1,000 - including mileage - then we claim the actual expenses. If your expenses are under £1,000 then we claim the income allowance.
You cannot create a loss with the trading allowance or property allowance
The trading allowance and property income allowance are capped at the amount of income you have. So if you only have £500 of self-employment income, then you can claim £500 of trading allowance (but remember if your self-employment income is at this level you don't need to declare it anyway). If however it's also a year when you have self-employment expenses of say £800 then you can claim these and create a loss in that year. Contact us if this applies to you and how to use it.
The allowance resets each year
You can also choose to use your allowance one year and the actual lexpenses the next year.
This may determine when you buy something
Imagine you are a graphic designer who has just started and wants a new software licence costing £800. You can wait to buy it. You're lucky that you don't have major other expenses - just £100 in the first year. This will increase to £2,600 in the second year.
This means other expenses of £100 in Year 1 and £2,600 in Year 2.
Buy software in Year 1 ->
Total expenses in Year 1 £100+£800 -> £900 (but it becomes £1,000 as you get the allowance)
Total expenses in Year 2 £2,600 (which is greater than the allowance)
Total expenses + allowance claimed £3,600
Buy software in Year 2 ->
Total expenses in Year 1 £100 (but it becomes £1,000 as you get the allowance)
Total expenses in Year 2 £2,600+£800 -> £3,400
Total expenses + allowance claimed £4,400
There will be other factors at play as well including whether you're earning above the personal allowance, and this is just a simple example.