Millions of Britons with side incomes could be sleepwalking into tax trouble by misunderstanding a crucial HMRC rule, experts are warning. The tax authority has clarified how the £6,000 trading allowance works - and getting it wrong could prove costly.
What Exactly Is The Trading Allowance?
The trading allowance allows individuals to earn up to £1,000 from various sources completely tax-free. However, many don't realise this has significant implications for those earning between £1,000 and £6,000 from side businesses or casual work.
The Crucial £6,000 Threshold
When your trading income exceeds £1,000, you have two options: claim actual expenses against your income, or use the £1,000 trading allowance. But here's where it gets tricky - once your income hits £6,000, you must register for self-assessment and declare this income to HMRC.
Who Needs To Pay Attention?
This affects anyone with side income including:
- Online sellers on platforms like eBay or Vinted
- Freelancers and gig economy workers
- People renting out property or equipment
- Those earning from hobbies that generate income
- Anyone with casual earnings from odd jobs
The Registration Deadline Trap
Many people mistakenly believe they don't need to register for self-assessment if their earnings are below the personal allowance threshold. However, the £6,000 trading income rule operates separately, meaning you could still need to complete a tax return even if you owe no tax.
What Happens If You Get It Wrong?
Failure to register for self-assessment when required can result in:
- Penalties from HMRC starting at £100
- Interest charges on any late tax payments
- Potential investigations into your tax affairs
- Additional stress and administrative burden
"Many people are completely unaware of this rule until it's too late," says a tax advisor familiar with HMRC's approach. "The £6,000 threshold catches out thousands of people each year who assume their side income is too small to worry about."
Practical Steps To Take Now
If you have any form of trading income:
- Keep accurate records of all income and expenses
- Monitor your total trading income throughout the tax year
- Register for self-assessment before the October deadline if you exceed £6,000
- Consider whether claiming actual expenses might be more beneficial than using the allowance
- Seek professional advice if you're unsure about your obligations
With the rise of the side hustle economy, understanding these rules has never been more important. Don't let a simple misunderstanding lead to an unexpected confrontation with the taxman.
