How much tax do you pay on the trading allowance?

Direct answer in 60 words

You pay £0 tax on income covered by the £1,000 UK trading allowance. Above £1,000 of gross trading income you pay Income Tax on the profit at your marginal band — typically 20% basic, 40% higher, 45% additional — plus Class 4 National Insurance at 6% (then 2%) once total self-employed profit clears £12,570. The allowance is per person, per tax year, against gross income.

What the trading allowance is

The trading allowance is a UK tax exemption of £1,000 of gross trading income per tax year, available to most individuals with self-employed or casual trading income. It has been in place since 6 April 2017 and is unchanged at £1,000 for 2025/26. It is set against gross income (sales before any costs), not profit.

Typical income that qualifies: sole-trader trading, freelance work, casual services such as babysitting, gardening, dog walking or odd-job tutoring, and hiring out personal equipment such as power tools. Income that does not qualify: trading income from a partnership, from a company you (or a connected person) controls, or from your own employer or your spouse's or civil partner's employer.

Three ways the trading allowance affects your tax bill

The £1,000 allowance applies before Income Tax is calculated, so the answer to "how much tax do you pay on the trading allowance" depends on which of the three scenarios you are in.

1. Gross trading income £1,000 or less — full relief

The allowance covers the lot. Tax due on the trading income: £0. You normally do not need to tell HMRC about the side hustle in isolation, although you must still keep records. You will still need to file a Self Assessment return if any of the standard "must register" triggers apply — claiming a loss, voluntary Class 2 NI, Tax-Free Childcare or Maternity Allowance based on self-employed income, or you are already in Self Assessment for another reason.

2. Gross trading income above £1,000 — claim the allowance

Taxable profit = gross trading income − £1,000. You must register for Self Assessment by 5 October after the tax year ends. You cannot also deduct actual expenses or capital allowances for that trade — it is allowance or expenses, not both. The allowance also cannot create a loss; the deduction is capped at the income amount.

3. Gross trading income above £1,000 — claim actual expenses instead

Taxable profit = gross trading income − allowable business expenses (and any capital allowances). This is the better route whenever your real expenses are higher than £1,000, or when you have made a loss and want to claim relief. You can switch between the allowance route and the expenses route year to year, picking whichever produces the lower taxable profit for that year's facts.

Worked examples: how much tax on £1,000 to £10,000 of side hustle income

The figures below assume you are using the £1,000 trading allowance (not actual expenses) for 2025/26. "Basic-rate" assumes your other income leaves headroom in the basic-rate band. "Higher-rate" assumes your PAYE salary already takes you over £50,270 so the side hustle profit is taxed at 40%, with Class 4 NI at 2%.

Class 4 NI in the "basic-rate" column assumes no other self-employed income, so total self-employed profit stays below the £12,570 lower profits limit. If you already have other self-employed profit, Class 4 at 6% kicks in from £12,570. Class 2 NI is voluntary from 2024/25 onwards. Use the calculator above to model your own combined PAYE + side hustle position.

Allowance vs actual expenses — which saves you more?

The rule of thumb: if your real allowable expenses are more than £1,000 in the year, claim actual expenses; otherwise claim the trading allowance.

Worked example. You sell £4,000 of handmade goods on Etsy with £2,200 of materials, listing fees and postage.

• Allowance route: £4,000 − £1,000 = £3,000 taxable profit.
• Expenses route: £4,000 − £2,200 = £1,800 taxable profit.
• Saving by claiming expenses: tax on £1,200 of profit — £240 at the basic rate or £480 at the higher rate.

To model your own numbers, enter your gross income in Side Hustle Income and either £1,000 or your actual costs in Side Hustle Expenses on the calculator above. Run it twice — once with the allowance, once with real expenses — and pick the lower tax figure. The dedicated freelance, Etsy, Vinted, eBay, tutor and delivery driver calculators do the same maths but with worked examples for those niches.

National Insurance interaction (often missed)

Class 4 National Insurance is calculated on profit after the trading allowance or actual expenses, not on gross income. For 2025/26 the rates are:

• 6% on self-employed profit between £12,570 and £50,270.
• 2% on self-employed profit above £50,270.

Class 2 NI has been voluntary since 2024/25 if profits are below the small profits threshold. Trading allowance users can still volunteer to pay Class 2 to protect entitlement to the State Pension and certain benefits.

The eight things people most commonly get wrong

1. Gross vs profit: the £1,000 limit is measured on gross income before any costs, not on profit.
2. Filing trigger: you only need to file Self Assessment for the side hustle if gross income is above £1,000 or another trigger applies — but record-keeping is still required either way.
3. PAYE stacking: the allowance applies on top of PAYE income. The exception is income paid by your own employer or your spouse's or civil partner's employer.
4. Personal allowance: the £1,000 trading allowance is in addition to the £12,570 Income Tax personal allowance, not instead of it.
5. Partnership exclusion: trading income received as a partner of a partnership does not qualify for the trading allowance.
6. Connected-party exclusion: income from a company you (or a connected person) owns or controls is excluded, even if dressed up as a separate trade.
7. Multiple trades aggregate: the £1,000 covers all of your sole-trader activity combined, not £1,000 per side hustle.
8. Property allowance is separate: there is also a £1,000 property allowance. You can use £1,000 of each in the same year. Rent a Room (£7,500) is a different scheme again.

March 2025 announcement: reporting threshold reform

At the Spring Statement in March 2025, the government announced that the Self Assessment reporting threshold for trading income will rise from £1,000 of gross income to £3,000, expected by the end of this Parliament. The detail is still going through the legislative process at the time of writing.

Important: this is a reporting change, not a tax change. The £1,000 trading allowance — the amount that is actually tax-free — is unchanged. Once implemented, people with gross trading income between £1,000 and £3,000 would no longer have to file a full Self Assessment return purely because of the side hustle, but any tax due on profit above £1,000 of allowance would still have to be paid through a simpler route HMRC is designing. Always check the latest GOV.UK guidance before relying on this for your own filing.

This page is general guidance, not personal tax advice. Borderline cases (loss claims, capital allowances, VAT, benefits, student loans, anything Scotland-specific or partnership) should be checked against the official sources below or with a qualified adviser.