Director Avoid The Self Assessment Tax Return With The £1,000 Trading Allowance

Tony Dhanjal

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The self assessment tax return is a task many individuals could do without. The return often takes along time to complete and most will fear making a mistake that results in errors and penalties. This is why many individuals will outsource the completion of their tax return to an accountancy professional.

But did you know that those with a small self-employment or side hustle might actually be able to avoid completing a self assessment altogether via the trading allowance.

In this article we will be looking at how some individuals with self employment may be able to use the trading allowance to avoid reporting income to HMRC.

Who Needs To Complete A Self Assessment Tax Return?

There are many different reasons why an individual may need to complete a UK tax return which must be understood before determining whether the trading allowance can be used by the individual to avoid submitting a return altogether.

The main “triggers” for self assessment are identified on the gov.uk website as:

  • Self employment
  • Rental income
  • Tips & commissions
  • Income from savings, investments and dividends
  • Foreign income
This is not an exhaustive list as some individuals may use the self assessment to claim allowances and report various losses but these represent some of the key reasons to complete a return.
 

The Trading Allowance

The trading allowance will usually apply to trading income. The allowance is currently £1,000 (21/22) and can be used in place of allowable expenses when calculating the net profit figure on the self assessment tax return.

This is of particular use where the allowable expenses relating to the trade are less than £1,000 as by replacing the expenses with the £1,000 allowance a tax advantage is usually achieved.

For example a self employed individual who had £5,000 or gross income and £500 of allowable expenses in the tax year would usually need to declare a net profit of £4,500 and may suffer tax on this amount.

By utilising the trading allowance the gross income remains at £5,000 but the allowable expenses are ignored and replaced by the £1,000  allowance which results in a net profit of £4,000 which may be subject to tax (depending on other income in the tax year).

This allowance cannot be used to create a loss which usually means that where allowable expenses are already greater than income it is usually beneficial to claim the expenses and report a loss.

If income is less than £1,000 then the allowance can reduce the profit to nil but no further than this.

The £1,000 trading allowance can be split across multiple trades if desired but the allowance applies per individual and not per trade so no matter how many trades the individual has the allowance will always be £1,000.

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Does The Trading Allowance Apply To Rental Income?

Many people assume that the trading allowance can be used in a similar way against rental income, when in fact the trading allowance itself does not apply in this situation but there is a £1,000 property allowance which works in a similar way.

The property allowance and the trading allowance are considered to be separate allowances which means that if an individual has both trading income and rental income they can potentially utilise both allowances.

So Who Can Avoid The Self Assessment Tax Return?

Where an individuals gross income from all self employments is less than £1,000 HMRC do not require that income to be reported at all.

This means that where income from self employment is the only reason requiring an individual to complete a tax return then they would be able to re-register. The individual must exercise caution here as where they have other reasons requiring a self-assessment, such as rental income or dividend income, HMRC may still be expecting a submission.

Where the individual has trading losses to report they may want to continue to complete a tax return so that these losses can be relieved against prior or future income (where they qualify). The rules for reporting trading losses differ slightly to those for trading profits and full guidance can be found on the gov.uk wesbite.

An example of where an individual may be able to deregister is an employed individual earning through PAYE who has a small side hustle selling items on etsy that generates £800 in gross income. In this case the side hustle income is likely to be the only “trigger” for a self assessment and as the side hustle income is covered by the trading allowance the individual would be able to avoid the return altogether by de-registering.

If in the above example though the etsy trade incurred £900 of allowable expenses then the individual may want to continue reporting on the self assessment so that the £100 loss is recognised and can potentially be offset elsewhere.

To learn more about how the trading allowance can be utilised by employed individuals who also have a side hustle. Check out the full course “Self Assessment Basics + Side Hustle” from the Accounting & Tax Academy.

Record Keeping

Even where an individual is not required to complete a UK tax return thanks to the £1,000 trading allowance, they are still required to keep records of their trading activity.
 
The records that need to be kept will vary depending on the circumstance but may include:
 
  • Bank statements
  • Copies of invoices + receipts
  • Credit card statements
  • Sales invoices
  • Mileage logs
Even where the trading allowance results in no need to report self employed income to HMRC, the record keeping requirements still apply.
 
HMRC can issue fines and penalties where insufficient records are maintained or where they are not maintained for a satisfactory period of time. Typically records need to be maintained for 5 years following the 31 January filing deadline that follows the end of the tax year.
 
 In the event of an investigation HMRC would want to see that any allowances have been applied correctly and that there were no other reasons that would have required the submissions of a UK tax return.

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Practice based accountant with over 10 years experience, specialising in SME's, Freelancers and Personal Tax. "I take pride in proactively recognising tax planning opportunities on behalf of clients to help them operate more efficiently."

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