Tax-free allowance on trading income

I am a graphic designer trading through a limited company but as a hobby I also personally do a little bit of buying and selling on ebay (not through my company) and make a few hundred pounds per year profit on this. Do I need to declare this on my tax return?

 

Tax-free allowance on trading income

 

Answer, January 2018

£1,000 tax-free trading allowance

The good news is that, provided the income from your hobby trading doesn’t exceed £1,000 in the tax year, you won’t pay any tax on your profit – however if you are already registered for self-assessment you will still need to include the income on your tax return.

Let’s look at the basics of what HMRC calls “tax-free allowance on trading income”.

This is a new allowance that came in on 6th April 2017.

So, if your eBay trading started before this, you will only be able to take advantage of the new allowance from 6th April 2017. For the tax year ended 5th April 2017, you will be taxed in the normal way. Let’s assume this was not the case and concentrate on the rules for 2017-18 tax year.

The £1,000 applies to your income, not your profit. So, add up the total value of your sales during the year (before any fees and charges are taken off). If this figure is less than £1,000, you will not pay any tax on your profit.

On your tax return, select the self employment pages, enter the total value of your sales as your income and then enter the same amount in the expenses section as “trading allowance”.

Should your sales exceed £1,000, you can either deduct your actual expenses (e.g. the cost of the items you bought for resale) or deduct the £1,000 allowance.

You don’t set a precedent if you decide to deduct the allowance this tax year – the next year you can choose to deduct your actual costs instead, if that gives a better result.

If you weren’t already registered for self assessment you would not have to declare your eBay trading income at all, unless your sales exceeded £1,000.

In this case, you would simply add up the value of your sales income each year, to check that it was below £1,000. Only if it exceeded this, would you need to register for self-assessment and complete a tax return (following the same rules as above). Otherwise, you would just need to keep a record of your trading income.

Of course, HMRC like to include a few quirks to catch people out, so you should be aware of the following potential pitfalls:

  • You won’t be able to get this allowance if you are trading as a partnership. So, avoid involving your spouse or anyone else in your hobby.
  • Don’t sell anything to your own limited company. Even selling one item to your company would mean you couldn’t claim the tax-free trading allowance at all. The same rule applies to an employer or someone closely related to you, or to a partnership of theirs.
  • Don’t bother trying to get around the £1,000 sales limit by categorising the various types of things you sell as separate hobby businesses. The £1,000 limit applies to all self employed trades carried on by you.

If you do your own research on this allowance, you will see that HMRC refer to it as “Tax-free allowances on property and trading income”. HMRC introduced a second £1,000 allowance for property income at the same time as the trading allowance. This one applies to individuals with income from property of less than £1,000 a year.

Both these allowances can be claimed at the same time, so a total of £2,000. Again, with the property allowance, you only need to register for self-assessment and include it on your tax return if the income exceeds £1,000 and you’re not already completing annual tax returns.

A pitfall with the property allowance is that you can’t claim it if you’re already claiming rent-a-room relief.

You might also want to read our article that discusses the key differences between limited companies and sole traders.