The trading allowance and MTD for Income Tax

acrenvo.com/guides/mtd-trading-allowance, last reviewed 31 October 2026

Niamh is fictional. She works part time and bakes celebration cakes for friends of friends at the weekend. In her first year the cakes brought in £800, and this year word has spread and she expects £2,400, with about £600 spent on ingredients and boxes. She has heard of a £1,000 allowance, and she has also heard that Making Tax Digital (MTD) for Income Tax is coming for smaller businesses. She would like to know how the two fit together.

They are separate rules: the allowance decides whether you need to tell HMRC about small amounts of income and how much tax-free income you can deduct, while MTD for Income Tax decides how you keep records and report once your income is larger. They meet at your records, and this guide explains where.

What the trading allowance covers

The trading allowance is a tax exemption for individuals with trading income from:

• self-employment
• casual services, for example, babysitting or gardening
• hiring personal equipment, for example, power tools

The allowance is up to £1,000 a year. Gross income means the total amount you would put on your tax return before any allowances or expenses are taken off. This allowance does not apply to trading income from a partnership.

The government has announced a higher figure from 6 April 2027. HMRC’s note published with the Budget on 28 October 2026 says: “From the tax year 2027 to 2028, this measure will increase the trading allowance from £1,000 to £3,000.” It adds: “This will also increase the Income Tax self-assessment reporting threshold to £3,000.” The change is announced for Finance Bill 2026-27, so it is not law yet, and the figure above is the one that applies today. Our Budget 2026 reading sets out what else it announced.

If your income is £1,000 or less

If your annual gross income from these is £1,000 or less, you do not need to tell HMRC, unless you cannot use the allowances or you must register for Self Assessment and declare your income on a tax return. One of GOV.UK’s reasons to register even then is if you have made a loss and want to claim relief on a tax return, and the GOV.UK page on the allowances lists the rest. If you use the trading or property income allowances you must keep a record of your income.

If your income is more than £1,000

Once your gross trading income goes over £1,000, you must register for Self Assessment by 5 October in the following tax year. At that level you can use the tax-free allowances, instead of deducting any expenses or other allowances.

If you use the allowances you can deduct up to the allowance, but not more than the amount of your income. This is known as ‘partial relief’. If your expenses are more than your income it may be beneficial to claim expenses instead of the allowances.

For Niamh, registering online should be the quicker route. HMRC has launched an improved registration service, and its press release of 9 September 2026 says that “Those using the new service will receive their UTR in their online account within 72 hours instead of waiting up to 15 days for it to arrive in the post.” The UTR, or Unique Taxpayer Reference, is the reference she needs before she can start her tax return. In the release’s words, “The online registration service is available to individual customers with a Personal Tax Account.” If an accountant registers her instead, “Agents must continue to use the existing processes, including using forms CWF1 or an SA1, to register.”

When you cannot use the allowance

You cannot use the allowances in a tax year if you have any trade or property income from:

• a company you or someone connected to you owns or controls
• a partnership where you or someone connected to you are partners
• your employer or the employer of your spouse or civil partner

The last of these matters if your side income comes from the same employer that pays your salary. The guide to side income alongside a job covers that situation more fully.

Where MTD for Income Tax comes in

MTD for Income Tax applies only when your qualifying income is over the threshold for the tax year, and the lowest threshold is £20,000. Qualifying income is your total income from self-employment and property, before expenses (also known as turnover), based on the tax return you submitted in the previous tax year. You are automatically exempt and do not need to use Making Tax Digital for Income Tax if your qualifying income is £20,000 or less.

GOV.UK’s qualifying income page does not mention the trading allowance. It defines qualifying income as income before expenses, and the allowances page says the allowance is deducted instead of expenses, but neither page says in so many words how the two fit together. If the difference could decide whether you are in or out, ask HMRC, or an accountant, before you rely on either reading.

Once you are using MTD, claiming the allowance also affects which income you keep digital records for. You will need to create digital records of your self-employment income and expenses and include them in your quarterly updates if you claimed the trading income allowance on your last Self Assessment tax return. At the end of the tax year, you can claim the allowance when you submit your tax return using your compatible software. You do not need to keep digital records of self-employment income for MTD for Income Tax if both of the following apply:

• the income was below the trading income allowance threshold
• you did not declare the income on your previous tax return

So a small trade you have never declared can stay out of your MTD records while it stays under the allowance, but one you declared or claimed the allowance for on your last return comes in. The guide to digital records explains what each record holds.

What GOV.UK leaves open

If your trade is growing towards £20,000, the guide to going over £20,000 explains which tax year HMRC looks at and when it writes. Income from selling through apps and marketplaces counts towards the allowance in the same way, and the guide to selling through online platforms covers what those platforms report.

Questions people ask about the trading allowance and MTD