For the 2026/27 UK tax year, an individual earns £900 of gross income from an occasional trading activity, such as selling handmade items, and has no other trading income. Under HMRC's trading allowance rules, what is the correct treatment?
- They must register for Self Assessment and pay tax on the full £900, because the trading allowance only applies to income above £1,000
- They can deduct actual business expenses in addition to claiming the full £1,000 trading allowance against the same income
- The £900 is taxed in full at their marginal rate, because the trading allowance does not apply to hobby-turned-business income
- Because gross trading income is £1,000 or less, the trading allowance can cover it completely, so no tax is due and, generally, there is no need to tell HMRC about it
Why D? And why not the others?
Correct answer: D. Because gross trading income is £1,000 or less, the trading allowance can cover it completely, so no tax is due and, generally, there is no need to tell HMRC about it
HMRC's trading allowance shelters up to £1,000 of gross trading income each tax year; because £900 is at or below that £1,000 ceiling, the allowance covers it in full, no tax is due, and HMRC's guidance says that in general someone in this position does not need to tell HMRC about it or register for Self Assessment, which is exactly what the correct option describes. The option requiring registration and full taxation is wrong because the allowance applies to gross trading income up to and including £1,000, not only above it. The option allowing both actual expenses and the full allowance against the same income is wrong because the trading allowance and a deduction for actual expenses are mutually exclusive against the same income; a taxpayer must choose one or the other, never both together. The option denying the allowance to hobby-turned-business income is wrong because the trading allowance applies to trading income generally and has no special exclusion for activities that started as a hobby.
Source: GOV.UK: Tax-free allowances on property and trading income