Tax allowance was originally announced at Budget 2016
The tax allowance was originally announced at Budget 2016 and was one of the several processes dropped from the Finance Act 2017 due to not enough time for deliberation in parliament. It was reinstated as part of Finance (No. 2) Bill 2017, published in September 2017 and the Finance (No.2) Act 2017 received Royal Assent on 16 November 2017.
The new tax allowances are available from 6th April 2017.The Finance Act amends ITTOIA 2005 as follows:
Paragraph 1 inserts a new Part 6A “Income charged under this Act: Trading and Property Allowances”. The new Part has 2 new chapters, “Chapter 1 Trading allowance” comprised new sections 783A-AR and “Chapter 2 Property allowance” comprised of new sections 783B-BQ.
Two new annual tax allowances for individuals
This measure introduces two new annual tax allowances for individuals of £1,000 each, one for trading and one for property income. The trading allowance will also apply to certain miscellaneous income from providing assets or services. Such as babysitting, gardening and hiring personal equipment, for example, power tools.
Where the allowances cover an individual’s relevant income (before expenses) then they will no longer have to declare or pay tax on this income but must retain the records. Those with higher amounts of income will have the choice, when calculating their taxable profits, of deducting the allowance from their receipts, instead of deducting the actual allowable expenses. The trading allowance will also apply for Class 4 National Insurance contribution purposes. Note if the income exceeds £1,000 a self-assessment return must be completed and if you normally complete a self-assessment. You can choose to register for self-assessment if you’ve made a loss and want to claim relief on a tax return but the allowance cannot create a loss.
The new allowances will not apply to partnership income from carrying on a trade, profession or property business in partnership nor apply in addition to relief given under the Rent-a-Room Relief legislation.
Decide on a year-by-year basis whether to claim the allowances
Individuals can decide on a year-by-year basis whether to claim the allowances. Obviously, the type of business and the level of expenses incurred in that year need to be considered. Businesses with regular outgoings higher than £1,000 will be better off claiming actual expenses. While small services businesses with minimal overheads and costs are likely to find the trading allowance more beneficial unless they have a one-off large expense in a year.
For the purposes of the trading allowance, the income and profits of all an individual’s trades are combined. This can lead to problems if an individual with an existing sole-trade business starts a smaller second trade.
For example, if a self-employed shop keeper starts up a small business trading on the internet:
Full relief will not be available for the new trade (assuming their combined income from both trades exceeds £1,000).
Partial relief is unlikely to be cost effective, as they would not be able to claim for the expenses incurred in their shop keeper trade.
This seems unfair as a partner with a small self-employed business could claim the full allowance.