# Trading allowance or expenses? The £1,000 test for a sole-trader client, with six worked cases

> A client with trading income over £1,000 can take the £1,000 allowance or deduct real expenses, never both. The break-even, six worked cases, who is excluded.

- Page to cite: https://aeolookup.com/accountants/trading-allowance-1000-or-expenses-which-is-better-for-a-client/
- Publisher: AEO Lookup (https://aeolookup.com/)
- Section: Accountancy practices, Records and bookkeeping
- Published 6 October 2026
- Key fact: We worked six cases from £700 to £4,000 of trading income. For any client whose income is over £1,000 the allowance wins when their real expenses are under £1,000, ties at exactly £1,000 and loses above it; at £4,000 of income with £1,600 of expenses the allowance leaves £3,000 of profit and expenses leave £2,400, a £600 difference (£120 of tax at 20%, before Class 4 National Insurance).
- Sources: GOV.UK "Tax-free allowances on property and trading income" (gov.uk/guidance/tax-free-allowances-on-property-and-trading-income), page last updated 8 May 2019, read 2026-10-06; GOV.UK "Expenses if you're self-employed", seen in a search summary only on 2026-10-06; the arithmetic is ours.

A client with trading income over £1,000 can either take the £1,000 trading allowance or deduct their real expenses. They cannot do both. GOV.UK says that if you claim the allowance you cannot deduct any other expenses or allowances. The page we read on 6 October 2026 shows its last update as 8 May 2019, so the rule has not moved for years, but the choice still catches clients every spring.

For a practice the question is small and frequent: which way leaves the lower profit? It comes down to one comparison.

## The three situations

GOV.UK describes them like this:

- **Full relief.** Gross trading income of £1,000 or less in the year, from one trade or several together. The client may not have to tell HMRC at all.
- **Partial relief.** Gross trading income over £1,000. The client can use the allowance instead of deducting expenses. They deduct up to £1,000, but never more than their income.
- **Expenses instead.** The client ignores the allowance and deducts what the business really spent. GOV.UK points out that this may suit a client whose expenses are higher than the allowance.

The £1,000 is one allowance for the whole year, however many small trades the client runs. It is gross income that counts, before any costs come off.

## The break-even

Once income is over £1,000, work out two profits:

- allowance profit = income minus £1,000
- expenses profit = income minus real expenses

The two are equal when real expenses are £1,000, whatever the income. Below that the allowance gives the smaller profit. Above it, expenses do.

## Six clients worked through

| Client | Income | Real expenses | Allowance profit | Expenses profit | Better route |
|---|---|---|---|---|---|
| A, weekend market stall | £700 | £300 | nil (full relief) | £400 | Allowance. Nothing to report on this income alone |
| B, dog walker | £1,500 | £700 | £500 | £800 | Allowance, by £300 |
| C, tutor | £4,000 | nil | £3,000 | £4,000 | Allowance, by £1,000 |
| D, photographer | £4,000 | £400 | £3,000 | £3,600 | Allowance, by £600 |
| E, craft seller | £4,000 | £1,000 | £3,000 | £3,000 | Tie. Keep it simple with the allowance |
| F, mobile hairdresser | £4,000 | £1,600 | £3,000 | £2,400 | Expenses, by £600 |

For client F the £600 saving is worth about £120 of Income Tax at the 20% basic rate. That ignores Class 4 National Insurance and any other income, so treat it as a rough scale rather than a quote.

Two things sit behind the table.

1. **Client B's position.** Her expenses are £700, which is less than £1,000. She would lose £300 of deduction by claiming costs, so most clients like her should take the allowance and stop keeping every receipt for tax purposes. They may still want the records for their own books.
2. **Client F's records.** Choosing expenses means the practice needs a total it can stand behind. Our [records request letter template](https://aeolookup.com/accountants/records-request-letter-template-accountants/) is a ready way to ask for them.

## Who cannot use the allowance

GOV.UK says the allowance does not apply to income from:

- a company the client, or someone connected to them, owns or controls;
- a partnership where the client, or someone connected to them, is a partner;
- the client's employer, or the employer of their spouse or civil partner.

A client who does odd jobs for a limited company they run, or a few evenings of paid work for their own employer, has to deduct real expenses instead.

## Losses and registration

A client whose expenses are higher than their income has a loss, and a loss can only be claimed by registering for Self Assessment and putting it on a return, GOV.UK says. Full relief gives no loss, so client A could not claim one even in a year when she spent more than she made.

On trading income above £1,000 the client must register for Self Assessment. Our guide to [what happens when a client registers late](https://aeolookup.com/accountants/what-happens-if-client-registers-self-assessment-late/) gives the penalty dates if that is missed. Clients who are new to the practice also need the checks in the [new client onboarding checklist](https://aeolookup.com/accountants/new-client-onboarding-checklist-accountants/).

## A short routine for the practice

1. At the year end ask for the client's total gross income for the trade, not the profit.
2. If it is £1,000 or less, record full relief and check whether the client has any other reason to file.
3. If it is over £1,000, ask for the total of real expenses.
4. Put the two profits side by side, as in the table, and write the result on the file.
5. Tell the client which way you chose and why, in one line. Clients who like to see the working will accept a table of two numbers.
6. Check the exclusions list before you rely on the allowance.

## A note on the figures

The only facts taken from GOV.UK are the £1,000 allowance, the exclusions and the loss rule. The profits in the table are our arithmetic, built on made-up clients, so they are worked examples and not tax advice. The 20% rate in the example is the basic rate and assumes the client pays tax at that rate in England.

Overlyft ![](https://aeolookup.com/img/d/ours-badge.png) can set up an AI assistant that watches each client's income and expense totals through the year, flags the ones whose costs have passed £1,000, and prepares the two-profit comparison for a person in the practice to sign off.

This is general information, not tax advice.

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General information for UK small firms, not legal, tax or financial advice.