Freelancers warned over £1,000 allowances

Two seemingly straightforward allowances of £1,000 each for taxpayers who freelance on the side “contain unexpected traps”.

Issuing this alert, the LITRG said recipients of the allowance must beware where both their main income is from self-employment and their second income from an unrelated small trade.

The two annual allowances, one for trading or miscellaneous income and the other for property income, allow taxpayers to receive up to £1,000 of each type of income tax-free.

Announced at Budget 2016, the allowances are generous, in that they let a taxpayer with a casual or tiny trade income -- and also property income, make use of both allowances.

And where they have property income, or trading/miscellaneous income, of over £1,000 they can opt for the relevant allowance and pay tax on the excess, instead of deducting expenses.

“The trading allowance could be beneficial to those who may top up their income with casual work such as in the ‘gig economy’ or small scale self-employment such as online selling,” said the Low Incomes Tax Reform Group (LITRG).

However, the group cautions that if taxpayers’ main source of income is from self-employment and their secondary income is from a completely separate small business, they “need to be very careful.”

The warning stems from the fact that income from all trading and casual income is “combined” when considering the trading allowance.

So if a taxpayer claims the allowance in such a situation, they cannot claim any expenses regardless of both how many businesses they have and how much their total business expenses are.

“We are concerned that taxpayers could unwittingly get this wrong,” says LITRG director Robin Williamson.

“[If they] mistakenly claim expenses that they are not entitled to, [they could] then find themselves the subject of an HMRC investigation.”

He added: “What seems like a straightforward allowance contains unexpected traps, so anyone who thinks they will benefit from the allowances should check HMRC official guidance before claiming. The situation is not helped by a lack of publicity to date about the existence of these allowances and how they work.”

Available since April 6th 2017, the new allowances will not apply to partnership income from carrying on a trade, profession or property business in partnership.


7th June 2018

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