Do you pay Tax on Small Earnings in the UK?

In this video we chat about this more from a YouTube perspective but it equally applies to just about any small earnings:

Let’s briefly chat about the ‘personal allowance’

Just to give a bit of background, in the UK we already have a tax free allowance. At the moment it’s set at £12,570 – so you can earn up to £12,570 per year completely tax free. We’ll ignore National Insurance (NI) for the minute. The tax free allowance, known as your personal allowance, normally goes up every year and providing your TOTAL income from all employments and self employments is below that threshold, you won’t pay any tax. You can find more information about this from the HMRC site here.

What about Self Assessment tax returns?

Well, here’s the thing. Just because you don’t have to pay any tax doesn’t mean you get away without having to complete a tax return! If you’re self employed you need to complete a tax return no matter how much you earn. Simples. End of. So even if you only earned £500 from a few Etsy sales you’d still have to keep full accounting records and do your annual Self Assessment tax return. It was a total ball-ache for everyone involved and a precious waste of everyone’s time and energy. Thankfully HMRC have seen the light and in 2018 introduced the small earnings TRADING ALLOWANCE! YAY!!

What is the Trading Allowance?

The trading allowance in the UK is a very simple £1,000 allowance designed to reduce paperwork both for HMRC and self employed folk. You’re entitled to a tax-free trading allowance on your first £1,000 of self employment income. That’s £1,000 turnover, not profit. You’re still self employed (see below) but you just don’t need to fill in a tax return… sort of. You might still be asked to complete a tax return but when you do so you’ll see a box asking “Was your turnover £1,000 or more in total from all self-employments?”. This is what the box looks like on a tax return:

If you select ‘No’ then the system automatically by-passes the entire ‘self employment’ section of your tax return. HMRC no longer care. You still need to submit a tax return if you’re asked to do so but there’ll be very limited information in it.

This is really fantastic news for anyone self employed making less than £1,000 per year. Think of:

• Musicians doing the odd bit of private music lessons, gigs and the like
• Maths teachers doing occasional private lessons from home
• Your eBay business that never really worked out
• Your pitiful YouTube income
• Income from the end of a tax year

In the past you should have been declaring all of the above on a tax return. Now you don’t have to if it’s less than £1,000… but please read on as it’s not quite that simple. Effectively though, you now have 2 allowances:

• Personal allowance: £12,570
• Trading allowance: £1,000

So my personal allowance is now £13,570?

No. Your personal allowance is £12,570… plus £1,000. The £12,570 covers ALL income. The £1,000 ONLY covers income from self employment. So yes, if you’re employed AND self employed you can technically earn £13,570 tax free. If you’re ONLY self employed then you can earn £12,570 tax free. Oh, and there’s the ‘income from property allowance’ too – also £1,000. So really your personal allowance is £12,570… plus £1,000 from self employment… plus £1,000 from property income. Sort of.

Use HMRC’s additional income checker

HMRC have kindly put together a very useful ‘additional income checker’ on their website. Please make use of this as it will give you a more comprehensive overview of when you do and don’t need to pay extra tax.

Is my business just a hobby?

Just need to cover this one very briefly. If you think your business is a business then it’s probably a business. You can’t pretend your business is a hobby just to avoid paying any tax. Ultimately it’s down to how ‘nice’ HMRC are feeling and by that read “how much budget do they have to chase the smaller businesses”. At the moment they have very little budget to do anything, but that doesn’t mean you’re off the hook. It’s really not worth the risk. You’re probably a business if:

• You have business cards
• You have a business web site
• You have a business domain name
• You sell regularly with a view to making a profit
• You make things to sell
• You sell things on a regular basis
• You earn affiliate income through any means
• You sell your services to people
• You earn AdSense income (i.e. YouTube)

Selling random junk on eBay is only a business if you’re selling stuff for more than you paid for it. Remember, we pay tax on PROFITS not on TURNOVER. So even if your tiny eBay business is making a small profit, it’s probably making a substantial loss by the time you account for all your business expenses. Too bigger topic for this article. Back to my initial point though, if you think it’s a business it’s probably a business.

What if I sell personal items?

So there’s a couple of things to consider here. Remember you only generally pay tax on your business profits. So even if you introduced personal items to your business and sold them, you’d only pay tax if you sold them for more than you bought them. As most people don’t manage to sell their second hand tat for a profit this is rarely a concern.

However you do need to think about the dreaded Capital Gains Tax. I won’t cover that in much detail here but normally if you’ve sold more than £6,000 of personal items then you need to think about Capital Gains Tax. However, again, you only pay tax on the profits (the gain). So if you bought an item for £10,000 and sold it for £6,000 then HMRC don’t care about this. You haven’t made a gain.

Do I still need to register for Self Employment?

This is a very vague one. I’d say yes. Register and put the ball back in HMRC’s court. If you continually submit tax returns selecting the ‘No’ box as shown above, they may eventually stop asking you to complete a tax return. I’m not sure – it’s too early days to say. Register for self employment to play safe.

Do I still need to keep accounting records?

Again, this is very vague. I’d say yes no matter what. You’re still in business and it’s just good practice to keep good records. Cover your bases in case HMRC turn around and say “You know how you said you only earned £999 last year? Prove it.”. Tax audits go much more smoothly when you’re forthcoming with information and having ‘holes’ in your accounts from years when you happened to make less than £1,000 will just make life awkward for everyone.

I’ve made a trading loss – should I just ignore it?

Ha ha! You’ve found the loop hole! Well, it’s not a loop hole. It’s a chasm of a hole that could catch out a lot of self employed folk if they invested heavily in their business in the first year while making less than £1,000 turnover. This is where you REALLY need to speak to an accountant. You need to safeguard your trading losses as these are an important part of running a business. You don’t have to pay tax on losses, obviously, and you can carry forward losses from year to year, generally. How do you do that if you haven’t completed a tax return? There is a little box on the tax return to allow for this, but it’s easily missed:

I would say, if you’ve made a loss of any size you absolutely need to speak to an accountant and make sure it’s carried forward from year to year until needed. What happens if you don’t declare your loss? No idea – I suspect you’ve lost it… pardon the pun.

Wrapping this up

The new trading allowance is fantastic. It’s a welcome threshold that will make almost zero difference to the Treasury’s income while reducing paperwork for everyone. But, don’t lose out on your all important trading losses. If in doubt, speak to an accountant.

If you spot any errors in this article please get in touch. Don’t forget to subscribe on YouTube and remember you can get access to extra useful content by becoming a site member. Please also join our mailing list so we can keep in touch with you outside the world of YouTube. We are 100% privacy focused and you can unsubscribe at any time.

Thank you for supporting this independent website and best of luck on your small business journey!

Originally published: 24th April 2019
Last updated: 29th July 2023