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

What Is the Trading Allowance?

The trading allowance is a flat £1,000 tax-free amount that sole traders and freelancers can use against their gross self-employment income each tax year. If your total trading income is £1,000 or less, you don't even need to tell HMRC about it. If it's above £1,000, you can choose to deduct the £1,000 allowance instead of calculating your actual business expenses.

Crucially, it's an either/or decision. You cannot claim the trading allowance and deduct your actual expenses — you must pick one method for each source of self-employment income.

How Actual Expenses Work

The alternative is to deduct the real costs you've incurred running your business from your gross income. Allowable expenses for sole traders in 2025/26 include:

• Office costs (stationery, software, a portion of home working costs)
• Travel and vehicle expenses (mileage at 45p per mile for the first 10,000 miles)
• Marketing and advertising costs
• Professional fees (accountant, solicitor)
• Equipment and tools (subject to capital allowances or the Annual Investment Allowance)
• Business insurance and relevant subscriptions

You must keep records and receipts to support every claim. HMRC can ask to see these during an enquiry.

A Simple Comparison: When the Trading Allowance Wins

Imagine you're a freelance writer who earned £8,000 in 2025/26 but spent very little on business costs — perhaps £300 on a software subscription and some stationery.

Using actual expenses: £8,000 – £300 = £7,700 taxable profit

Using the trading allowance: £8,000 – £1,000 = £7,000 taxable profit

Here, the trading allowance saves you tax on an extra £700 of income. With basic rate Income Tax at 20% and Class 4 NICs at 6% (on profits above £12,570), every £700 of saved profit matters — though in this case total profit is still under the Personal Allowance of £12,570, so the main benefit is reducing Class 2 and Class 4 NIC exposure once profits exceed the relevant thresholds.

When Actual Expenses Win

Now consider a freelance graphic designer who also earned £8,000 but spent £2,400 on a new laptop, Adobe Creative Cloud, client travel, and a co-working space membership.

Using actual expenses: £8,000 – £2,400 = £5,600 taxable profit

Using the trading allowance: £8,000 – £1,000 = £7,000 taxable profit

Actual expenses are clearly better here — they reduce taxable profit by £1,400 more than the trading allowance would.

The Break-Even Point

The decision is straightforward once you know your total allowable expenses. If your actual business expenses exceed £1,000, always use actual expenses. If they're below £1,000, the trading allowance is simpler and more beneficial.

Watch Out for These Traps

• Multiple income sources: If you have more than one self-employment trade, you can apply the trading allowance to each separately — but you must apply it consistently within each trade.
• Losses: If you use the trading allowance, you cannot create or carry forward a loss. Actual expenses can generate a loss you offset against other income.
• Capital allowances: The trading allowance cannot be combined with capital allowances. If you bought expensive equipment, actual expenses will almost always be better.
• Partially exempt income: The trading allowance applies to gross income, not profit. Don't confuse the two when making your calculation.

How to Decide in Practice

Before filing your 2025/26 Self Assessment return (due by 31 January 2027), add up all your allowable business expenses. If the total is above £1,000, claim actual expenses. If it's below, take the trading allowance and save yourself the admin. Either way, keep your records — HMRC can still enquire into returns where the trading allowance has been used.

If you're unsure, EasyTax can calculate both options automatically and show you which saves more tax before you submit.