If you trade as a sole trader, HMRC gives you a choice each tax year. You can deduct the £1,000 trading allowance from your income. Or you can deduct your actual business expenses instead. You cannot do both for the same income.
So which one saves you more tax? The answer depends on one simple comparison. This guide explains how the trading allowance works, where the break-even point sits, and how the answer changes when the allowance rises to £3,000 in April 2027.
What is the trading allowance?
The trading allowance is a flat £1,000 deduction for people with trading or miscellaneous income. It has existed since April 2017. Most sole traders and side hustlers can use it.
It works in two ways. First, if your total gross trading income is £1,000 or less in the tax year, the allowance covers it fully. You normally do not need to declare that income or file a tax return for it. Second, if your income is above £1,000, you can still use the allowance. HMRC calls this “partial relief”. You deduct £1,000 instead of your real expenses.
There are limits, though. You cannot use the allowance on income from your employer, or from a company or partnership you are connected with. You also cannot use it and claim expenses on the same income. And you still need basic records of what you earned, even when the allowance covers everything.
The break-even point, in plain English
The rule is simple. Compare your real allowable expenses with the allowance.
- If your expenses are less than the allowance, the allowance wins.
- If your expenses are more than the allowance, claim your expenses.
- If they are about the same, it makes little difference this year.
That is the whole decision. But worked examples make it easier to see, because the saving also depends on your tax rate.
Worked example 1: low expenses
Amara earns £5,000 a year from freelance design work. She also has a job, so her personal allowance is already used. Her real business expenses are £600 for software and a laptop bag.
- Using the allowance: £5,000 − £1,000 = £4,000 taxable profit.
- Claiming expenses: £5,000 − £600 = £4,400 taxable profit.
The allowance leaves £400 less profit to tax. At the basic rate of 20%, that saves her £80. Her expenses were below £1,000, so the allowance was the better choice — and she did not need to itemise anything.
Worked example 2: higher expenses
Now take Bilal, who trades online and earns £8,000. His real costs are £2,500. He pays for stock, postage, platform fees and a small storage unit.
- Using the allowance: £8,000 − £1,000 = £7,000 taxable profit.
- Claiming expenses: £8,000 − £2,500 = £5,500 taxable profit.
Claiming expenses leaves £1,500 less profit to tax. At 20%, that saves him £300 compared with the allowance. His costs were well above £1,000, so expenses win easily.
What changes in April 2027?
The government has announced that the trading allowance rises from £1,000 to £3,000 from 6 April 2027. This was set out in the 2026 Budget. At the time of writing, it still needs to pass into law through the Finance Bill, so treat it as announced rather than final.
The change moves the break-even point a long way. Take Amara again, with £2,400 of side income and £200 of expenses in 2027/28. The new £3,000 allowance would cover her income completely. She would have no tax to pay on it and no return to file for it. Traders with expenses between £1,000 and £3,000 will also need to redo the comparison, because the allowance may now beat their real costs.
Until 6 April 2027, the old £1,000 limit still applies. Do not use the £3,000 figure on a 2026/27 return.
When claiming expenses is better for another reason
Sometimes the better answer is not about this year’s tax bill. If your expenses are so high that they create a trading loss, the allowance cannot help you. The allowance never creates a loss. Claiming expenses can, and a loss may be carried back or set against other income. That can be worth more than a small saving today.
Also remember that expenses include things the allowance ignores. Capital items are claimed through capital allowances on the expenses route, under the cash basis for most sole traders. And if you use simplified expenses for a vehicle or your home, those figures count as part of your real expenses in the comparison.
Landlords: the property allowance works the same way
There is a matching £1,000 property allowance for rental income. The logic is identical. You choose the allowance or your actual costs, not both, and the break-even point is the same comparison. It also rises in line with the same announced changes, so landlords should rerun the numbers for 2027/28.
A quick decision checklist
- Add up your real allowable expenses for the year, honestly and completely.
- Compare the total with the allowance for that tax year — £1,000 for 2026/27.
- Pick the higher deduction. That is your answer for this year.
- Repeat the comparison every year, because your costs will change.
- Keep your income records either way. The allowance removes paperwork, not record-keeping.
If your affairs are more complex — several income sources, a partnership, or a loss to use — an accountant can run both versions before you file. Our guide to how regional accounting firms work explains what to look for when you choose an accountant as a small business. And if your side income grows into a business that needs its own server or software, our guide to choosing a Windows VPS for your small business shows how to keep that running cost under control.
Figures checked against HMRC guidance in November 2026. The £3,000 allowance from April 2027 is announced government policy that still requires legislation. This article is general information, not tax advice for your individual circumstances.
