Setting up a business is daunting enough, let alone getting your head around the tax system! The more you know starting out, the smoother the ride. One concept that may be relevant to you is the trading allowance, also known as the "trading income allowance." This allowance is a tax-free amount that you can earn from providing services as a freelancer. Bonus, it can be used in addition to your Personal Allowance!

So, what is the trading allowance and how does it work?

Here's what you need to know:

1. The trading allowance is currently set at £1,000 per year. This means that you can earn up to £1,000 per year from self-employment without paying any tax on it. Ideal for fresh-faced freelancers testing the waters. 

2. The allowance is available to anyone who is self-employed, regardless of the type of work they do. This includes freelancers, contractors, and small business owners.

3. The allowance is applied automatically, so you don't need to do anything to claim it. If your self-employment income is less than £1,000, you won't need to report it to HMRC (the UK tax authority).

4. The allowance is only available for trading income (money earn from selling your services), not property income. This means that if you earn rental income from letting out a property, it is not eligible for the allowance.

5. If you earn more than £1,000 from self-employment, you will need to report your income and pay tax on the excess. You can do this through the Self Assessment tax return process.

6. The trading allowance can be useful for those who have a small amount of self-employment income on the side, in addition to their main job. It can also be helpful for those who are just starting out in self-employment and may not be earning much income yet. 

7. It's important to note that the trading allowance does not exempt you from National Insurance contributions (NICs). If you are self-employed, you are still required to pay NICs on your self-employment income, even if it is less than £1,000.

8. The trading allowance is currently set at £1,000 per year, but it is subject to change. It is worth keeping an eye on the current allowance to ensure that you are aware of any changes that may affect you. 

So, how can you make the most of the trading allowance as a freelancer?

Here are a few tips:

1. Keep track of your income and expenses. It's important to keep accurate records of your self-employment income and expenses to ensure that you are claiming the allowance correctly. You can use accounting software or a spreadsheet to help with this.

2. Consider setting up a separate bank account for your self-employment income. This can make it easier to track your income and expenses and ensure that you are claiming the allowance correctly.

3. Consider joining a professional association or union. Many professional associations and unions offer support and advice to their members, including help with tax and accounting matters.

4. Seek advice from a tax professional. If you are unsure about the trading allowance or have any questions about your tax obligations as a freelancer, it may be worth seeking advice from a tax professional. They can help you understand your rights and responsibilities and ensure that you are complying with the law.

In conclusion, the trading allowance is a tax-free amount that you can earn from self-employment without paying any tax on it. It is currently set at £1,000 per year and is available to anyone who is self-employed, regardless of the type of work they do. However, it is important to note that the allowance does not exempt you from National Insurance contributions and is subject to change. 

Photo: Tima Miroshnichenko and Andrea Piacquadio