What Is the Trading Allowance?
The Trading Allowance gives you £1,000 of tax-free income from self-employment or casual trading each tax year. If your total gross income from side activities stays at £1,000 or below, you owe nothing. No tax, no National Insurance, no Self Assessment return, no need to tell HMRC at all.
It covers any kind of trading income: selling on eBay, making things on Etsy, freelance writing, tutoring, dog walking, car boot sales, TaskRabbit jobs. The source doesn't matter. What matters is that your total gross trading income for the year doesn't exceed £1,000.
💡 Selling personal items is different. If you sell your old clothes, furniture, or gadgets at a loss (less than you paid for them), that is not trading income. It falls under Capital Gains rules instead, and there is usually no tax on personal possessions sold for under £6,000. The Trading Allowance applies when you buy or make items with the intention of selling them for a profit.
Two Ways to Use It
When your side income exceeds £1,000, you still get to use the Trading Allowance. You just have a choice to make.
Option A: Deduct the £1,000 Allowance
Subtract £1,000 from your gross income. Pay tax on whatever is left. No receipts needed, no record-keeping.
Best when your actual expenses are low, or you don't want to track them.
Option B: Deduct Actual Expenses
Add up your real costs (materials, postage, fees, supplies) and deduct those instead. You need receipts and records.
Best when your expenses are over £1,000 per year.
You pick one option per tax year. You cannot use both at the same time. Once you choose, that applies to all your trading income for the year.
Worked Example: eBay Seller Under £1,000
Sarah works full-time as a teaching assistant earning £24,000. On weekends, she buys children's clothes from charity shops and resells them on eBay. In 2026/27, her eBay sales total £800.
Her gross trading income (£800) is below the £1,000 Trading Allowance. The entire amount is covered. She pays zero tax on her eBay income and does not need to file a Self Assessment return.
Tax on eBay income: £0. No paperwork needed.
Sarah's employment income is taxed normally through PAYE. Her eBay income is a separate matter, and the Trading Allowance wipes it out entirely.
Worked Example: Etsy Seller, Allowance vs Expenses
James sells handmade candles on Etsy. In 2026/27, his gross sales are £3,000. His actual expenses (wax, wicks, jars, postage, Etsy fees) add up to £1,500.
Option A (Trading Allowance): £3,000 minus £1,000 = £2,000 taxable profit. As a basic rate taxpayer, he pays 20% tax on £2,000 = £400 tax.
Option B (Actual expenses): £3,000 minus £1,500 = £1,500 taxable profit. At 20%, he pays £300 tax.
James saves £100 by claiming actual expenses instead of the Trading Allowance.
The breakeven point is simple: if your real expenses exceed £1,000, claim actual expenses. If they're less than £1,000, use the allowance and skip the record-keeping.
Trading Allowance vs Actual Expenses
This table shows the tax due at basic rate (20%) for different levels of side income, comparing the two options.
| Gross Income | Actual Expenses | Tax (Allowance) | Tax (Expenses) | Better Option |
|---|---|---|---|---|
| £800 | £200 | £0 | £120 | Allowance |
| £2,000 | £600 | £200 | £280 | Allowance |
| £3,000 | £1,000 | £400 | £400 | Same |
| £3,000 | £1,500 | £400 | £300 | Expenses |
| £5,000 | £2,500 | £800 | £500 | Expenses |
| £10,000 | £4,000 | £1,800 | £1,200 | Expenses |
All figures assume basic rate (20%) Income Tax. Higher rate taxpayers (40%) pay double these amounts, making the choice between allowance and expenses even more important at higher income levels.
How It Interacts with Your Day Job
The Trading Allowance is separate from your employment income. Your salary is taxed through PAYE as normal. Your side income is a separate source with its own rules.
However, your total income from all sources determines which tax band your side income falls into. If your employment salary is £45,000 and you earn £3,000 from Etsy (minus the £1,000 allowance = £2,000 taxable), that £2,000 sits on top of your salary. Part of it could be taxed at 40% if your total income crosses the £50,270 Higher Rate threshold.
Class 2 and Class 4 NI: If your self-employment profits exceed the Small Profits Threshold (£6,725 in 2026/27), you also owe Class 4 National Insurance at 6% on profits between £12,570 and £50,270. At low side income levels, this rarely applies.
When You Must File Self Assessment
The rules are straightforward:
- •Gross income £1,000 or less: No need to file. No need to register. No need to tell HMRC anything.
- •Gross income over £1,000: You must register as self-employed with HMRC and file a Self Assessment tax return by 31 January following the end of the tax year.
Registration is done online at GOV.UK. You need to register by 5 October after the end of the tax year in which you started trading. Late registration can result in penalties.
On your Self Assessment return, you can still claim the £1,000 Trading Allowance as a deduction. You just deduct £1,000 from your gross income on the self-employment pages. The difference is that you do need to file the return itself.
Edge Cases and Traps
- Multiple side hustles: The £1,000 allowance covers all your trading income combined. If you earn £600 on eBay and £500 tutoring, your total is £1,100 and you exceed the limit.
- Income from an employer or connected company: The Trading Allowance does not apply to income from your employer, or from a company you are connected to. It is only for genuinely separate trading income.
- Couples: Each person gets their own £1,000 allowance. If you both sell on eBay, that is £2,000 tax-free between you.
- Gross income, not profit: The £1,000 limit applies to your gross income (total sales), not your profit after expenses. If you sell £1,200 of goods but spent £500 making them, you have exceeded the limit even though your profit is only £700.
- Digital platforms reporting to HMRC: Since January 2024, platforms like eBay, Etsy, Airbnb, and Vinted report seller income to HMRC if you exceed 30 transactions or €2,000 in a year. HMRC can cross-check this against your tax return.
Key Rules at a Glance
- •You cannot use both the Trading Allowance and deduct expenses. Pick one.
- •The allowance is per person, per tax year. Couples each get £1,000.
- •It does not apply to income from letting property. That has its own £1,000 Property Income Allowance.
- •It does not apply to partnership income if your share exceeds £1,000.
Common Questions
Does the Trading Allowance apply to eBay sales?
Yes. If you sell items on eBay, Vinted, or similar platforms and your total gross income from those sales is £1,000 or less per tax year, the Trading Allowance covers it completely. You pay no tax and do not need to tell HMRC. This applies to regular selling of goods for profit. Selling personal belongings you no longer want is not trading income in the first place, so those sales don't count toward the £1,000 limit.
Can I claim the Trading Allowance and deduct expenses?
No. You must pick one or the other for each tax year. Either deduct the flat £1,000 Trading Allowance from your gross income, or deduct your actual expenses. You cannot do both. If your expenses are more than £1,000, claiming actual expenses will give you a lower taxable profit.
Is there a separate Property Income Allowance?
Yes. There is also a £1,000 Property Income Allowance for rental income. It works the same way as the Trading Allowance but applies to property income instead. You can claim both allowances if you have both types of income. They are completely separate.
Do I need to register as self-employed if I use the Trading Allowance?
If your trading income is £1,000 or less, you do not need to register as self-employed or file a Self Assessment tax return. If your income exceeds £1,000, you must register with HMRC as self-employed and file a Self Assessment return, even if you use the Trading Allowance to reduce your taxable income.
Does my side income affect my PAYE tax code?
Not directly. Side income covered by the Trading Allowance does not affect your employment tax code because you never declare it to HMRC. If your side income exceeds £1,000 and you file Self Assessment, HMRC may adjust your tax code to collect any extra tax through PAYE, or you may pay it as a lump sum through your tax return.