Hamster blog

What is the trading allowance and how does it work?

Published 1 October 2026 · Figures are for the 2026–27 tax year

What it covers

The trading allowance is a tax exemption of up to £1,000 per tax year (6 April to 5 April). It applies to income from:

• self-employment, such as reselling, delivery driving, tutoring or freelance work
• casual services, such as babysitting or gardening
• hiring out your own equipment, such as power tools

It is separate from your £12,570 Personal Allowance, so you get it even if your salary already uses that up. The amount has been £1,000 since it was introduced and is the same for 2026–27.

If you earn £1,000 or less

You do not pay tax on the income and you do not need to tell HMRC or file a tax return for it. This is called full relief, and it is automatic.

The £1,000 is measured against your income before expenses, not your profit. If you sell £1,300 of handmade candles that cost you £700 to make, your income is £1,300 and you are over the limit.

It is also one allowance in total. Earnings from every side hustle are added together, so £600 from dog walking and £600 from Etsy is £1,200.

If you earn more than £1,000

You must register for Self Assessment and declare the income. You then choose how to work out your taxable profit:

• Claim the allowance: take £1,000 off your income and pay tax on the rest. This is called partial relief.
• Claim your expenses: take off what you actually spent on the business instead.

HMRC is clear that you cannot deduct any other expenses if you claim the allowance. That includes flat-rate mileage. So the rule of thumb is simple: add up your allowable expenses, and if they come to less than £1,000, claim the allowance; if they come to more, claim the expenses.

A worked example

You earn £4,000 from a side hustle on top of a job that uses your Personal Allowance.

• With £300 of expenses: the allowance is better. £4,000 − £1,000 = £3,000 profit, and 20% tax is £600. Claiming expenses would have cost you £740.
• With £1,800 of expenses: expenses are better. £4,000 − £1,800 = £2,200 profit, and 20% tax is £440. Claiming the allowance would have cost you £600.

You make the choice each year on your tax return, so you can switch as your side hustle changes.

When you cannot use it

You cannot claim the trading allowance against income from:

• a company that you, or someone connected to you, own or control
• a partnership in which you, or someone connected to you, are a partner
• your employer, or your spouse's or civil partner's employer

When to register even though you are under £1,000

You can stay under the limit and still want a tax return. HMRC lists two cases: you made a loss and want to claim relief for it, or you want to pay voluntary Class 2 National Insurance to protect your State Pension record.

Keeping track

The allowance only helps if you know which side of £1,000 you are on, and whether your expenses have overtaken it. Hamster is a free Android app that totals your side-hustle income and costs through the year and uses the £1,000 allowance until your logged costs beat it. With Premium, it also alerts you the moment you pass the £1,000 mark.

This is general information, not personal tax advice. Rules and rates change — check the linked GOV.UK pages or speak to an accountant about your own situation.