Trading allowance vs expenses: which should you use?

When you work out your taxable profit you can either deduct what the business actually cost you, or knock off a flat £1,000 instead. Choosing well is one of the easiest tax savings a small sole trader can make — here is how to decide.

✓Checked for 2026/27 — uses the rates for 6 April 2026 to 5 April 2027, last reviewed 27 October 2026.

What the trading allowance is

The trading allowance is a £1,000 tax-free amount for income from self-employment, side hustles and casual work. It does two separate jobs:

1. Full exemption. If your total gross trading income for the tax year is £1,000 or less, it is completely tax-free and you usually do not need to register or tell HMRC about it.
2. An alternative to expenses. If you earn more than £1,000, you can deduct £1,000 from your income instead of deducting your actual costs.

The allowance is per person, not per business. If you run two small side businesses, the £1,000 covers both together. Note too that the test is gross income — what customers paid you before any costs — not profit.

The simple rule

For the same trade you pick one method or the other, never both. The decision comes down to a single comparison:

• If your allowable expenses are less than £1,000, the trading allowance gives you a lower taxable profit.
• If your allowable expenses are more than £1,000, claiming them gives you a lower profit.

That sounds obvious, but many people with low-cost businesses — tutors, freelance writers, people selling a handful of crafts — never add up their costs and simply leave the £1,000 unclaimed. Equally, people with real outgoings sometimes grab the allowance because it feels easier and pay tax they did not need to.

Three worked examples

The tutor's profit is £650 lower with the allowance. If they are a basic-rate taxpayer with a full-time job using their personal allowance, that is worth about £130 of income tax. The nail technician saves tax on £2,100 of extra deductions by claiming real costs — around £420 at 20%, more once Class 4 National Insurance is counted if their profit is over £12,570. The dog sitter's income is under £1,000, so it is all covered and there is nothing to report.

Try your own figures in the self-employed tax calculator, which compares both methods automatically.

Things the allowance cannot do

It cannot create a loss

Deducting the allowance can bring your profit down to zero, but not below. If your business genuinely made a loss — say you bought equipment in your first year — you need to claim actual expenses to record that loss and use it against other income or carry it forward.

You cannot mix the two

You cannot claim £1,000 and then add a few extra expenses on top. It is one route or the other for that tax year, though you can choose differently next year.

Some income is excluded

HMRC does not let you use the trading allowance against income from certain connected sources. In general, it cannot be used for income you receive from:

• your employer, or your spouse's or civil partner's employer;
• a partnership you are a partner in;
• a company that you, or someone connected to you, controls.

If any of these apply, check the GOV.UK guidance on tax-free allowances for trading income or ask an accountant before relying on the allowance.

When registering still makes sense under £1,000

Even if your trading income is covered, you can still choose to register and declare it. Reasons people do so include making a loss they want to record, or wanting to pay voluntary Class 2 National Insurance (£3.65 a week in 2026/27) to protect their State Pension record when profits are below the £7,105 small profits threshold.

The property allowance works the same way

There is a matching £1,000 property allowance for rental income. Gross property income of £1,000 or less is tax-free, and above that you can deduct £1,000 instead of real costs. Two differences are worth knowing:

• If you use the property allowance, you cannot also claim the tax credit for mortgage interest — so it rarely suits landlords with a mortgage.
• For a furnished room in your own home, the Rent a Room Scheme (£7,500 a year, or £3,750 if the income is shared) is usually far more generous. Our Airbnb and Rent a Room calculator compares all three options.

The trading and property allowances are separate, so someone with a small side business and a small amount of rental income can use both.

Keep records either way

Using the allowance means you do not need to list your expenses on the return, but you still need records of your income. And if you might switch to claiming expenses in a busier year, it pays to have been tracking costs all along — receipts are much harder to find in hindsight.

Estimates only, not tax advice. These figures are a guide based on the information you enter and the 2026/27 rules. Your own position can differ — check GOV.UK or an accountant before relying on them.