Trading Allowance vs Actual Expenses: Which Saves You More Tax?

What Is the Trading Allowance?

The trading allowance is a £1,000 tax-free allowance available to UK individuals who earn money from self-employment, casual work, or selling goods and services. Introduced in April 2017, it means that if your gross self-employed income is £1,000 or less in a tax year, you owe no Income Tax or National Insurance on it and you do not even need to register for Self Assessment.

If your income exceeds £1,000, you can still use the allowance. Instead of deducting your actual business expenses from your income, you simply deduct £1,000 as a flat relief. HMRC calls this partial relief.

How the Two Methods Compare

To decide which approach works best for you, you need to compare two figures:

• Method 1 – Trading Allowance: Taxable profit = Gross income minus £1,000
• Method 2 – Actual Expenses: Taxable profit = Gross income minus your real, allowable business costs

Whichever method produces the lower taxable profit will save you more tax. It really is that straightforward.

When the Trading Allowance Wins

The trading allowance is most valuable when your genuine business expenses are low. For example, a copywriter who works from home and has minimal software subscriptions, no travel costs, and no equipment purchases might only have £200 in legitimate expenses during the year. Using the trading allowance instead saves an extra £800 from their taxable income, potentially reducing their tax bill by up to £320 if they are a basic rate taxpayer.

It is also a major time-saver. If you choose the trading allowance, you do not need to keep receipts or maintain detailed expense records for that source of income. For freelancers with a small side income on top of employment, this simplicity alone can make it worthwhile.

When Tracking Actual Expenses Wins

If your genuine allowable expenses exceed £1,000, you must use the actual expenses method to avoid overpaying tax. This is common for freelancers who:

• Purchase professional equipment such as cameras, laptops, or specialist tools
• Pay for significant software subscriptions or professional memberships
• Travel regularly to client sites and claim mileage at 45p per mile
• Rent a workspace or pay for a dedicated home office proportion of household bills
• Invest in training that is directly relevant to their current trade

A graphic designer who spends £1,800 on software, equipment, and professional development in the 2025/26 tax year would be £800 better off using actual expenses rather than the flat £1,000 allowance.

Important Rules to Remember

There are a few restrictions that catch freelancers out. You cannot use the trading allowance if you earned money from your employer, a partnership you belong to, or a close company in which you are a participator. If your freelance work is for your own limited company, the allowance does not apply.

You also cannot claim the trading allowance and deduct actual expenses on the same income stream. It is one method or the other for each trade.

How to Make Your Decision Each Tax Year

The good news is that you can choose the most beneficial method each tax year. Here is a simple process to follow before filing your Self Assessment return:

• Add up all your allowable business expenses for the year with receipts and records
• If your total expenses are below £1,000, claim the trading allowance
• If your total expenses exceed £1,000, use actual expenses and keep all supporting records
• If your gross trading income is £1,000 or less, you may not need to file at all, but check with HMRC or a tax adviser if you have other income sources

The Bottom Line

The trading allowance is a genuinely useful relief for freelancers with low overheads or modest side income. However, it is not automatically the right choice. Running the numbers each April takes just a few minutes and could make a meaningful difference to your final tax bill. When in doubt, keep your expense records throughout the year so you always have the option to choose.