A little-known tax rule from HMRC is offering a potential £1,000 boost to the tax-free personal allowance for millions of people across the UK. The regulation, known as the trading allowance, allows individuals to earn additional income from side projects completely free of tax.
How the £1,000 Trading Allowance Works
Financial experts at AJ Bell have highlighted that everyone has the right to earn up to £1,000 annually from side hustles without paying any tax on it. This applies to income from trading or property that is separate from a person's main employment.
Laura Suter, a personal finance analyst at AJ Bell, explained the significant saving this represents. "If you’re a basic-rate taxpayer this will save you up to £200 a year, or £400 a year for a higher-rate taxpayer," she noted.
The rule is designed to support the growing 'gig economy' and covers a wide range of activities. Common examples that qualify include:
- Babysitting or dog-walking.
- Selling handmade goods like jam at a local market.
- Renting out a driveway or parking space.
- Selling items regularly on online marketplaces as a small business.
Critically, if your annual side income stays below the £1,000 threshold, you typically will not need to complete a Self Assessment tax return. However, it is wise to keep records of any earnings in case HMRC requests them.
Navigating the Rules for Higher Earnings
For those whose side ventures generate more than £1,000 in a tax year, the benefit does not disappear. You can still claim the £1,000 allowance, but you must declare the extra income via a tax return and pay any tax due on earnings above the allowance.
Ms Suter also reminded savers to make use of another valuable tax break: the starting rate for savings. "Anyone with income of £12,570 or less gets a £5,000 tax-free allowance for their savings income," she stated.
This means, with a top easy-access savings rate of 5%, an individual could hold up to £100,000 in savings before facing tax on the interest. For a basic-rate taxpayer, this shelter can equate to a £1,000 annual tax saving.
The allowance reduces for those earning between £12,570 and £17,570. For every £1 earned over the £12,570 personal allowance, £1 of the savings allowance is lost.
Maximising Your Tax-Free Income
Alongside the trading and savings allowances, taxpayers should consider other HMRC schemes like the Rent a Room scheme, which allows you to earn £7,500 a year tax-free from letting out furnished accommodation in your home.
By combining these legitimate allowances, individuals can significantly increase their overall tax-free income. The key is to understand the rules, declare income accurately when required, and keep clear financial records for any side earnings throughout the tax year.
