Trading allowance vs expenses: which saves you more tax?

Updated 21 October 2026 · For the 2025/26 tax year (return due 31 January 2027)

Every side hustler filing a 2025/26 return has one decision that can change the tax bill more than anything else: deduct the £1,000 trading allowance, or deduct your actual business expenses? You can't do both. Here's how to choose.

What the trading allowance is

The trading allowance is a tax exemption of up to £1,000 a year for individuals with trading income – self-employment, casual services and hiring out personal equipment. It works in two ways:

• Full relief: if your gross trading income is £1,000 or less, it's all covered. You usually don't need to tell HMRC at all.
• Partial relief: if your gross income is over £1,000, you register for Self Assessment and can deduct a flat £1,000 instead of your real expenses. On the SA103S this goes in box 10.1.

The simple rule

If your allowable expenses are under £1,000, the allowance usually wins. If they're over £1,000, claim expenses. The aim is the bigger deduction, because that gives the smaller taxable profit.

Worked examples (2025/26)

All assume the person has a job using their Personal Allowance, so profit is taxed at 20% basic rate (England, Wales and NI) with no Class 4 NI because profit is under £12,570.

Side hustle	Sales	Real costs	Profit using allowance	Profit using expenses	Better option
Freelance proofreader	£4,000	£150	£3,000 (tax £600)	£3,850 (tax £770)	Allowance – saves £170
Vinted reseller	£5,000	£3,200	£4,000 (tax £800)	£1,800 (tax £360)	Expenses – saves £440
Candle maker on Etsy	£2,200	£1,050	£1,200 (tax £240)	£1,150 (tax £230)	Expenses – saves £10
Weekend dog walker	£900	£80	£0 – full relief	£820	Allowance – nothing to declare

Resellers and makers usually have high costs (stock and materials), so expenses tend to win. Service side hustles – tutoring, design, writing – usually have low costs, so the allowance tends to win.

Don't forget the hidden expenses

Before deciding, make sure you've counted everything allowable. People often forget:

• platform and payment fees (Etsy, eBay, PayPal, Stripe, SumUp)
• postage and packaging
• business mileage at HMRC's simplified rate of 45p a mile for the first 10,000 miles
• HMRC's flat rate for working from home: £10 a month for 25–50 hours, £18 for 51–100 hours, £26 for 101+ hours
• the business share of your phone and broadband
• software, subscriptions and advertising
• equipment bought for the business (under the cash basis)

Mileage and use-of-home can easily push a "low-cost" service hustle over £1,000 of expenses.

The catches

• No losses with the allowance. You can't deduct more than your income, so if your hustle lost money, claim expenses to record the loss.
• All-or-nothing. Using the allowance means no other expenses or capital allowances for that trade that year.
• One allowance for all trades. The £1,000 covers your total trading income, not £1,000 per hustle.
• Connected income excluded. You can't use it for income from your employer, your spouse's or civil partner's employer, or a company or partnership you're connected to.
• Benefits effects. Using the allowance reduces your income for things like student loan repayments and the High Income Child Benefit Charge, but GOV.UK notes Universal Credit income isn't affected by the allowance.

A quick way to decide

1. Total your gross sales for 6 April 2025 to 5 April 2026 (before fees).
2. Total every allowable expense for the same period, including mileage, use-of-home and platform fees.
3. If expenses are £1,000 or less, use the allowance. If they're more, claim expenses.
4. If expenses are close to £1,000, double-check you haven't missed anything – a single forgotten fee can tip the balance.

Higher-rate taxpayers gain twice as much from getting this right: every extra £100 of deduction saves £40 of Income Tax instead of £20. If your self-employed profit is over £12,570, it also cuts Class 4 National Insurance at 6%.

You can choose again every year

The decision is made each tax year. Use the allowance in a quiet year and claim expenses in a year you bought lots of stock. That's why it's worth keeping a record of your expenses even if you expect to use the allowance – you can only compare if you know the number.

How to claim it on your return

On the self-employment (short) pages, enter your turnover in box 9, then the allowance in box 10.1 and leave the expense boxes blank. Or, to claim expenses, fill in boxes 11–19 or just the total in box 20. See our SA103S box-by-box guide.

Frequently asked questions

Can I claim the trading allowance and expenses?

No. For a trade you either deduct the £1,000 trading allowance or your actual allowable expenses – not both.

When is the trading allowance better than expenses?

When your allowable expenses for the year are less than £1,000. If expenses are over £1,000, claiming expenses usually gives a lower taxable profit.

Can the trading allowance create a loss?

No. You can deduct up to £1,000 but not more than your income, so the allowance can't create a loss.

Can I switch between the allowance and expenses each year?

Yes. The choice is made each tax year, so you can use whichever is better each time.

Sources (GOV.UK, checked 21 October 2026)

• Tax-free allowances on property and trading income
• Self Assessment: self-employment (short) (SA103S)
• Simplified expenses if you're self-employed
• Expenses if you're self-employed

General information, not tax advice. Rules can change – always check GOV.UK or speak to an accountant. January Sorted is not affiliated with HMRC.

More side hustle tax guides

• Self Assessment deadline 31 January 2027: what to file and pay
• Do I need to tell HMRC about my side hustle?
• Etsy seller tax UK: what to declare for 2025/26
• SA103S explained box by box (2025/26)