The trading allowance is commonly used in two scenarios, making this term quite confusing.
Before you're registered with HMRC - it exempts some low earners from submitting a tax return
After you've registered with HMRC - It allows you to simplify the expenses of your sole trader income or business.
1. Trading under the allowance and not submitting a tax return
The trading allowance allows anyone with a self-employed or miscellaneous income of up to £1000 to avoid submitting a tax return.
It applies to your total self-employed income (total sales) rather than profit. If you organise your transactions in Earnr, you’ll see your total income for the year on the insights tab.
2. Trading over the allowance and claiming it in place of expenses.
If you earn over £1,000 (total sales) you can still claim the allowance. In this scenario, you apply it in place of any expenses to reduce your taxable income by £1,000.
You can utilise the trading allowance under Self Employment on the tax tab. Select the allowance there and confirm the form.