Changes to the self-employed trading allowance reporting requirements

Tax simplification that makes things more complicated? That’s exactly what some experts are saying about the new changes to how side hustles are taxed. The threshold for filing a Self-Assessment tax return is set to increase from £1,000 to £3,000 which sounds like good news at first glance. But with the tax-free trading allowance remaining at £1,000, many people will find themselves in a confusing middle ground: not needing to file a full tax return but still owing tax on their earnings.

What exactly is the Trading Allowance?

The trading allowance is a tax-free amount that individuals can earn from casual self-employed work without needing to pay tax or even report it to HMRC. It’s particularly helpful for people with small side hustles or those just dipping their toes into self-employment.

Currently, this allowance sits at £1,000 per tax year. That means if your self-employed income is £1,000 or less, you don’t need to declare it to HMRC or pay any tax on it. It’s a straightforward relief that helps reduce paperwork for both taxpayers and HMRC.

For example, if you occasionally sell handmade jewellery at local markets and make £950 in a year, you wouldn’t need to register for Self-Assessment or pay tax on those earnings. However, if you made £1,100, the entire amount would potentially be taxable (though you could still use the allowance or claim your actual expenses to reduce your tax bill).

Recent changes to the Trading Allowance

The government has recently announced some significant changes, but it’s important to understand exactly what’s changing and what isn’t.

Interestingly, the £1,000 tax-free trading allowance itself is not changing. What’s changing is the threshold for when you need to file a Self-Assessment tax return for trading income.

Within this parliament (which is by the end of 2029), the threshold for filing a Self-Assessment tax return for trading income will rise from £1,000 to £3,000. This creates a situation where:

• If you earn under £1,000: No tax is owed and there’s no requirement to declare it.
• If you earn between £1,000 – £3,000: Tax may still apply on profits, but you can report the income using a ‘simplified online service’ rather than completing a full tax return.
• If you earn over £3,000: You must register for Self-Assessment and complete a tax return and pay any taxes due on profits.

This creates an interesting distinction where the reporting threshold and the tax-free allowance are now different amounts.

How these changes might affect you

These changes will have varied impacts depending on your circumstances:

For casual sellers and those with very small side hustles earning under £1,000 annually, nothing changes – you still don’t need to report or pay tax on this income.

If you earn between £1,000 and £3,000, you’ll have an easier reporting process. Instead of completing a full Self-Assessment return, you’ll be able to use a simplified online platform to declare and pay any tax owed. This should save you time and potentially reduce the stress associated with tax filing.

However, it’s crucial to remember that while the reporting process is changing, trading incomes greater than £1,000 will still need to report and pay tax. The tax-free allowance remains at £1,000.

For example, a local dog walker in Sevenoaks earning £2,500 a year won’t need to file a full Self-Assessment return once these changes take effect, but she will still need to pay tax on £1,500 (her income minus the £1,000 allowance) using the new online service.

What steps to take now

Given that these changes won’t come into effect immediately (they’re planned by the end of 2029), here’s what you should do in the meantime:

1. Continue following the current rules: If you earn more than £1,000 from self-employment, you still need to register for Self-Assessment and file a tax return.
2. Keep good records: Regardless of these upcoming changes, it’s always wise to keep records of your income and expenses. Like full-time freelancers, side hustlers will still want to keep records of income and expenses in case HMRC requests these details from them in future.
3. Consider if claiming expenses might be better: Remember that you can choose to claim your actual business expenses instead of the trading allowance if that’s more beneficial. For many businesses with costs, this is often the case.

Stay informed: These changes are still in the planning stages, and details about the proposed ‘simplified online service’ and how it works aren’t fully available yet. We’ll keep you updated as more information becomes available.

Time to get strategic with your finances

It’s really important to understand tax changes like these to help you make good business decisions. While this simplification is generally positive news for those with modest side incomes, decoupling the thresholds for reporting and paying tax on small incomes has the potential to create confusion.

At Adams Accountancy, we’re here to ensure you’re always making the most tax-efficient decisions for your business. It doesn’t matter if you’re an established sole trader or just starting a small side hustle, our friendly team can provide clear, jargon-free advice tailored to your situation.

Need specific advice about how these trading allowance changes might affect you? Drop us a line – we love making tax simple! Contact us online or call 01322 250 001 for a free, no-obligation conversation. Remember, as we always say to our clients – no question is too silly when it comes to understanding your taxes.