Since 2017 every individual has had a £1,000 trading allowance. It works in two ways. If your gross trading income for the year is £1,000 or less, it’s tax free and you don’t need to report it. If it’s more, you choose: deduct your actual business expenses in the normal way, or deduct the flat £1,000 instead.
That last word matters. The allowance is instead of expenses, not as well as. So the decision comes down to one comparison.
The rule of thumb
- Expenses under £1,000: claim the allowance. Your profit is lower and there are fewer receipts to keep.
- Expenses over £1,000: claim the expenses.
- Expenses bigger than income: claim the expenses, because that gives you a loss you can use. You can’t claim the trading allowance and make a loss at the same time: the allowance can only take profit down to nil, so if your costs are above your income, claim actual expenses and the loss is on your return.
Mileage and working-from-home flat rates count as expenses, so if you’d rely on those, add them into the comparison.
A worked example
Hannah Reid Design, 2026/27, April to September
| With actual expenses | With the trading allowance | |
|---|---|---|
| Income | £3,927.98 | £3,927.98 |
| Deduction | £775.75 | £1,000.00 |
| Taxable profit | £3,152.23 | £2,927.98 |
Hannah’s expenses, including her mileage and home-office claims, come to £775.75. The allowance is £224.25 bigger, so her taxable profit is £224.25 lower, and she can bin the receipts. Her income records still matter: HMRC can ask how she arrived at £3,927.98.
If her expenses climb past £1,000 by March, the answer flips, which is why it’s worth comparing at the end of the year rather than deciding in April.
Where it goes on the return
On the full self-employment pages, the allowance goes in box 16.1 and the expense boxes are left blank. On the short form it has its own box too. SA103 explained lists the boxes.
Things the allowance can’t do
You can’t use it against income from your own employer, from a partnership you’re a partner in, or from a company you or a close relative controls. It’s also separate from the £1,000 property allowance, which works the same way for rental income: you can have both, one for each kind of income.
What the spreadsheet does
The Tax Estimate tab of the Sole Trader Bookkeeping spreadsheet makes the comparison for you from the income and expenses you’ve recorded, and the Dashboard reports the deduction applied, so you can see the decision, not just the answer.
Questions people ask
My side business made £800 this year. Do I need to tell HMRC?
If your total trading income for the year is £1,000 or less and you don't already file a return for another reason, the allowance covers it in full and you don't need to register or report it. Keep a note of the income in case HMRC asks.
Can I claim the allowance and my mileage?
No. The allowance replaces every expense, including mileage and working-from-home flat rates. It's the £1,000 or your actual expenses, never both.
Can the allowance create a loss?
No. The allowance can reduce your profit to nil but not below it. If your expenses are bigger than your income you have a loss, and only claiming actual expenses lets you use that loss against other income or carry it forward.
Does it matter for National Insurance?
Yes. Class 4 National Insurance is worked out on the same taxable profit, so whichever route gives the lower profit lowers both.
Sources
- gov.uk: Tax-free allowances on property and trading income.
- HMRC: Self-employment (full) notes, SA103F, box 16.1.
This is general information, not tax advice. Figures are as published on gov.uk on the date shown and can change. Check them, or ask an accountant, before you rely on them.