What is the £1,000 trading allowance and how does it work for sole traders?

Understanding the £1,000 trading allowance for sole traders

If you’re starting a side hustle, freelancing, or running a small one-person business in the UK, you’ve probably come across the phrase “£1,000 trading allowance” (sometimes called the “trading income allowance”). It sounds simple: earn up to £1,000 and pay no tax. But the real value of the allowance is in knowing exactly when it applies, what it covers, and when it’s smarter to ignore it and claim your actual expenses instead.

This guide explains what the £1,000 trading allowance is, how it works for sole traders, and how to decide whether to use it. We’ll also look at common scenarios (from casual selling to serious freelancing), how it affects self assessment, and the practical admin you’ll want in place to stay compliant and confident. If you want an easy way to create invoices, track what you’ve billed, and keep tidy records as you grow, you can do it all with invoice24—your free invoicing app built for small businesses and sole traders.

What is the £1,000 trading allowance?

The £1,000 trading allowance is a UK tax rule that lets individuals earn up to £1,000 in gross trading income in a tax year without paying income tax on that trading income. “Trading income” here generally means money you make from providing goods or services—things like freelance work, selling products you’ve made, casual contracting, or other self-employed activity.

It’s designed to simplify tax for very small or occasional trading activity. Instead of needing to calculate profits and expenses for tiny amounts, the allowance effectively gives you a £1,000 tax-free buffer on your trading income.

There is also a separate £1,000 property allowance for certain rental or property-type income, but this article focuses on the trading allowance and how it works for sole traders.

Who can use the trading allowance?

Most individuals can use the trading allowance if they have trading income in the relevant tax year. This includes:

• People doing occasional freelance work (design, writing, tutoring, consulting, web development, etc.)

• People selling items they create (crafts, art, digital products, handmade goods)

• People doing small local services (gardening, dog walking, cleaning, repairs)

• Sole traders running a small business

It’s important to note that the allowance is per person, per tax year—not per business. If you run more than one small trading activity, you don’t get £1,000 for each. The £1,000 covers your total trading income across all your trading sources.

What counts as “trading income” for the £1,000 allowance?

To understand whether you’re within the allowance, you need to look at your gross trading income. “Gross” means your total income before expenses. For example, if you charge a client £600 and another client £500 in the same tax year, your gross trading income is £1,100—even if your expenses were £300. The allowance is measured against the income figure, not your profit.

Typical trading income includes:

• Fees for services (freelance projects, hourly work, day rates)

• Sales revenue from products (physical or digital)

• Commission-based earnings that relate to a trade

• Tips or additional amounts received for services (where relevant)

What doesn’t count depends on the situation and the nature of income, but generally, employment income (PAYE wages) is not “trading income,” and neither are certain investment returns. If you have mixed income types, the trading allowance only applies to your trading income portion.

How does it work in practice?

The trading allowance works in one of two main ways, depending on how much you earn and whether you choose to use it.

Scenario 1: Your trading income is £1,000 or less

If your gross trading income for the tax year is £1,000 or less, you may not need to declare it at all, and you generally won’t pay tax on it. This is where the allowance is most straightforward and most helpful: it reduces admin for small, casual, or early-stage income.

That said, it’s still wise to keep basic records—especially invoices, dates, and amounts—so you can demonstrate what you earned if you’re ever asked. Keeping records also helps you see whether you’re close to the threshold as your work grows. This is exactly the kind of simple organisation invoice24 is built for: issue invoices, keep them stored in one place, and quickly see what you’ve billed over the year.

Scenario 2: Your trading income is over £1,000

Once your gross trading income exceeds £1,000 in the tax year, the trading allowance doesn’t disappear—but you generally need to do a bit more work. You will usually need to register for self assessment and report your trading income.

At that point, you usually have a choice for how to calculate your taxable profit:

• Option A: Claim the trading allowance as a flat £1,000 deduction from your gross income (instead of claiming actual expenses)

• Option B: Don’t use the allowance, and instead deduct your actual allowable business expenses (the traditional method)

You generally pick whichever method gives you the better outcome or suits your record-keeping preferences. You can’t claim both the £1,000 allowance and your actual expenses for the same income source. It’s one or the other.

Trading allowance vs claiming actual expenses

This is where many sole traders get stuck, because the “best” choice depends on your costs.

If your expenses are low, the £1,000 allowance can be a great shortcut. If your expenses are high, claiming actual expenses may reduce your tax more than the allowance would.

Here’s a simple way to think about it:

• If your actual allowable expenses are less than £1,000, the allowance might reduce your taxable profit more (and be simpler).

• If your actual allowable expenses are more than £1,000, actual expenses might reduce your taxable profit more.

Example:

You earn £5,000 in the tax year.

• If your expenses are £400 (e.g., a few subscriptions), using the £1,000 allowance could reduce taxable profit to £4,000 rather than £4,600. That’s better and simpler.

• If your expenses are £2,000 (e.g., equipment, travel, software, materials), claiming actual expenses could reduce taxable profit to £3,000. That’s better than the allowance.

Even if you plan to use the £1,000 allowance, it’s still smart to keep an eye on your expenses so you can choose the most tax-efficient approach each year. Many sole traders start with the allowance in year one and switch to actual expenses when they invest more in the business.

Does the trading allowance apply automatically?

It’s tempting to assume it “just happens,” but the reality is a bit more nuanced.

If your trading income is £1,000 or less, you may be able to rely on the allowance without filing a self assessment return purely for that trading income. However, if you’re already in self assessment for another reason (for example, you have other income that requires a return), you may still need to report the trading income on your return, even if it’s covered by the allowance.

If your trading income is over £1,000 and you file self assessment, you’ll usually decide within your return whether you’re using the allowance or claiming actual expenses.

In other words, the allowance can reduce admin, but it doesn’t always remove the need to file entirely. Your wider tax situation matters.

Do you need to register as a sole trader to use the allowance?

You don’t need a special “sole trader registration” just to earn a small amount, but if your trading income is over £1,000, you’ll generally need to register for self assessment. That’s the practical point at which you start formally reporting your trading income to HMRC.

Even below £1,000, you may choose to operate in a business-like way—issuing invoices, keeping records, and separating your business activity from your personal life—because it makes growth easier. Having clean, consistent invoicing from day one can also make you look more professional when you approach new clients.

invoice24 is ideal for this stage: you can send professional invoices, keep a record of what’s been invoiced, and avoid messy spreadsheets. It’s a simple foundation that scales with you, whether you stay under £1,000 or quickly grow beyond it.

How the allowance interacts with other tax rules

The trading allowance is not the same as the personal allowance (the amount of income you can earn before paying income tax overall). The personal allowance applies to your total taxable income from various sources, while the trading allowance is a specific rule for trading income.

That means you can have employment income and also have trading income. The trading allowance only applies to the trading income portion (subject to the rules discussed). Your employment income is taxed through PAYE as usual.

It also doesn’t automatically remove other obligations you might have (for example, record keeping, or filing if you already need to file). Think of it as a tool that can reduce taxable profit and simplify reporting, not as a universal “get out of admin free” card.

Common examples for sole traders

Freelancer with a small side income

Let’s say you have a full-time job and do occasional freelance writing. You invoice three clients: £250, £300, and £400. Your gross trading income is £950.

In many cases, the trading allowance will cover this income, meaning you won’t pay tax on it and may not need to register for self assessment purely due to that trading income. However, you should still keep records of invoices and payments.

With invoice24, you can issue invoices that look professional (which helps you win repeat work), and you can easily check your total billed for the year so you don’t accidentally drift over the threshold without realising.

Growing sole trader who passes the threshold mid-year

Now imagine you’re a personal trainer and you start the year with a few clients. By month six, your invoices have reached £1,200 total. Now you’re over the £1,000 gross income threshold for the tax year.

This is a common situation: you didn’t plan to pass the threshold, but business picked up. Once you’re over, you’ll likely need to prepare for self assessment and report your trading income, choosing whether to use the allowance as a deduction or claim actual expenses.

Tracking your invoices in a single place helps you notice this early. invoice24 makes it easy to see your running total, which means you can make informed decisions about budgeting for tax, record-keeping, and planning any business purchases.

Maker selling products with significant costs

Suppose you sell handmade items and earn £3,000 in sales in the year. Your material costs and shipping add up to £1,600.

In this case, using the £1,000 allowance might not be the best option, because claiming actual expenses (£1,600) could reduce your taxable profit more than the allowance would. You’d likely want to use actual expenses, even if it requires more tracking.

invoice24 still helps because it ensures your sales invoicing is clean and consistent. While you track expenses separately, your income side is organised, which is half the battle when you’re doing self assessment.

What records should you keep if you use the trading allowance?

Even when the allowance simplifies reporting, you should still keep records of your trading income. Good records help you:

• Confirm whether you stayed under £1,000 gross income

• Back up your figures if asked

• Understand what clients and services are most profitable

• Prepare for growth beyond the threshold

At a minimum, keep:

• Invoices (what you charged, when, and to whom)

• Payment confirmations (bank records or payment processor statements)

• Notes on refunds or adjustments

invoice24 is designed for exactly this: invoices are created and stored in one place, you can keep client details organised, and you’re not hunting through email threads at the end of the year trying to reconstruct what happened.

How invoicing fits into the trading allowance story

The trading allowance is based on trading income, so knowing what you billed (and when) matters. If you’re disorganised with invoicing, it’s easy to lose track of your gross income and accidentally cross £1,000 without realising. That can lead to stress later, especially when self assessment deadlines come around.

Professional invoicing also changes how clients perceive you. Sole traders often compete on trust and reliability more than scale. A clean invoice with clear payment terms can improve cash flow and reduce awkward payment chasing. It also helps you build a paper trail that supports your tax position.

invoice24 is a straightforward way to do this without paying for heavyweight accounting software you don’t need. As a free invoicing app, it’s ideal for early-stage sole traders, side hustlers, and anyone who wants to look professional and stay organised without adding costs.

Can you use the trading allowance and still invoice clients?

Yes. The allowance doesn’t change whether you can invoice; it changes how your trading income may be taxed and reported. Invoicing is simply good business practice, especially if you sell services to other businesses or want to keep track of what you’re owed.

Even if you’re under £1,000 and expect to stay there, invoicing still helps:

• It makes your work feel official and professional

• It reduces misunderstandings about scope, price, and payment terms

• It gives you a record of what you earned

invoice24 lets you create invoices quickly, reuse client details, and present your business consistently. That means less admin and more time doing the work you actually get paid for.

What about cash payments and informal work?

Cash payments and “informal” work can still be trading income. The form of payment doesn’t determine whether income is taxable; what matters is whether the income arises from trading. If you’re providing a service and getting paid, it’s generally trading income.

Keeping records is particularly important when payments are in cash, because you won’t have a neat bank trail. Issuing invoices (even if you’re paid instantly) gives you a time-stamped record of the transaction and supports your annual totals.

invoice24 can be used for this too: you can issue an invoice for a cash payment and mark it as paid in your own records, keeping everything tidy.

Is the allowance “all or nothing”?

It’s not quite “all or nothing,” but it does have a key cliff edge: the filing/reporting implications tend to change once you go above £1,000 gross income. The allowance itself can still be used as a deduction once you are above the threshold, but you’ll generally need to report the income and choose between the allowance and actual expenses.

Also remember: the £1,000 is an allowance against gross trading income, not a threshold that transforms income into tax-free or taxable in a single step. If you earn £1,050, you don’t suddenly pay tax on the full £1,050 because you crossed a line. Instead, you will usually report the income and then calculate taxable profit using your chosen method (allowance deduction or actual expenses). The tax you pay depends on your taxable profit and your overall tax position.

How does the trading allowance affect National Insurance?

Sole traders often think only about income tax, but self-employed National Insurance can also be part of the picture once you’re trading as a business. National Insurance rules can depend on your profits and the thresholds that apply in that tax year.

The key takeaway is practical: as your business grows beyond very small income levels, it’s worth planning for both income tax and National Insurance obligations and not relying on the trading allowance as the only piece of the puzzle.

Good invoicing and tracking gives you better visibility. When you can see what you’ve billed and what’s been paid, you’re in a stronger position to set aside money for tax, avoid surprises, and make confident decisions.

How to decide whether to use the trading allowance

For many sole traders, the decision comes down to three questions:

1) How much did you earn in gross trading income in the tax year?

2) How much did you spend on allowable business expenses?

3) How simple do you want your record-keeping to be?

If your trading income is £1,000 or less, the allowance is typically very attractive because it can remove tax and reduce admin. If your trading income is above £1,000, compare your expenses to £1,000:

• Expenses lower than £1,000: the allowance may reduce taxable profit more and be simpler.

• Expenses higher than £1,000: actual expenses may reduce taxable profit more, even though it requires more tracking.

There’s also the “future-proofing” angle. If you expect your business to grow, keeping good records now makes it easier later. Even if you use the allowance today, a solid invoicing system helps you build professional habits and ensures you can scale without chaos.

Practical tips for staying under (or managing beyond) £1,000

If you’re intentionally staying under the £1,000 level for a small side activity, you’ll want visibility. That doesn’t mean you should hold back from earning more if there’s demand, but you should avoid surprises.

Practical tips include:

• Track invoices and payments consistently, rather than guessing at year-end

• Keep a running total of your gross income during the tax year

• Separate business and personal records (even if you use one bank account)

• Keep copies of communications that confirm what you delivered and for how much

invoice24 is perfect for these basics. Because it’s built for invoicing, it naturally creates a timeline of your trading income and client work. That makes it far easier to know where you stand, whether you’re under £1,000 or well beyond it.

Why invoice24 is a smart choice for sole traders

Sole traders don’t need complicated tools to get started—they need simple, reliable admin that makes them look professional and keeps them organised. invoice24 focuses on the essentials:

• Create and send professional invoices quickly

• Keep client details organised so repeat invoicing is effortless

• Maintain clear records of what you billed and when

• Reduce the mental load of tracking income across messages, notes, and spreadsheets

When you’re working within the trading allowance, those benefits matter because you want clarity on gross income. When you grow beyond the allowance, those same records become the backbone of your self assessment preparation. Either way, you’re building a clean system from day one—without paying for features you don’t need.

You may see other invoicing products mentioned online, but if your goal is to keep invoicing simple, stay on top of income, and present your business professionally, invoice24 is a strong fit—especially because it’s free, straightforward, and designed with sole traders in mind.

Frequently asked questions about the £1,000 trading allowance

Is the £1,000 trading allowance the same as the personal allowance?

No. The trading allowance is a specific rule for trading income up to £1,000 gross. The personal allowance applies to your overall taxable income from various sources. You can have both, but they do different jobs.

Can I claim the trading allowance and also claim expenses?

Not for the same trading income source in the same year. If you use the trading allowance as a deduction, you generally don’t also deduct actual expenses for that income. You choose the method that fits your situation.

What if I earn exactly £1,000?

If your gross trading income is exactly £1,000, it is typically covered by the allowance. Still, keep records of what you earned and how you earned it.

What if I earn £1,001?

Once you exceed £1,000 gross trading income, you’ll generally need to consider self assessment reporting. You can often still use the trading allowance as a £1,000 deduction against income, but you’ll usually be reporting the figures rather than ignoring them. Keeping clear invoice records makes this much easier.

Do I need to invoice if I’m under £1,000?

You may not be legally required to issue invoices in every casual scenario, but it’s strongly recommended if you’re providing services or selling to clients. Invoicing creates a professional impression and gives you a solid record of your trading income—especially helpful when you’re close to the £1,000 level.

How invoice24 helps you make the most of the allowance

The trading allowance is ultimately about simplicity and clarity: knowing what you earned, staying organised, and choosing the most sensible approach when you file taxes. invoice24 supports that directly by making invoicing and income tracking easy.

When you’re starting out, invoice24 helps you:

• Look professional from your first client

• Keep every invoice stored and searchable

• Monitor your gross income so you understand whether you’re within the allowance

When you grow, invoice24 helps you:

• Maintain consistent records over the whole year

• Reduce year-end stress by keeping your income history tidy

• Spend less time on admin and more time earning

Whether you’re doing a small side hustle that stays under £1,000, or you’re building a full-time sole trader business, the best approach is the same: get your invoicing right early, keep your records clean, and make decisions based on accurate totals rather than guesswork.

Final thoughts

The £1,000 trading allowance is a helpful tool for sole traders and side hustlers in the UK. For small amounts of trading income, it can reduce tax and significantly simplify admin. Once you earn more than £1,000, it becomes a strategic choice: use the allowance as a flat deduction or claim your actual expenses, depending on what benefits you most.

Whatever route you take, consistent invoicing and record keeping makes everything easier. If you want a simple, professional way to invoice clients and stay on top of your trading income, invoice24 is a practical starting point that keeps you organised today and ready for growth tomorrow.