Trading Income (Self-Employment Profits)

What Counts as Trading Income

Trading income is money you earn from carrying on a trade, profession, or vocation. This includes:^[1]

Sales revenue from goods or services
Fees and commissions for work you’ve done
Tips and gratuities
Payments in kind (goods or services instead of cash — taxed at market value)
Insurance payouts for loss of trading income

The £1,000 Trading Allowance

If your total self-employment income is under £1,000 in a tax year, it’s automatically tax-free. You don’t need to register with HMRC or file a return.^[3]

If your income exceeds £1,000, you have a choice:

Deduct the £1,000 allowance from your income instead of claiming actual expenses, or
Claim your actual allowable expenses (usually better if your expenses exceed £1,000)

You can’t use both the trading allowance and claim expenses — it’s one or the other.

Calculating Your Taxable Profit

Your taxable profit is:^[2]

Total income − Allowable expenses = Taxable profit

This profit is then added to any other income you have and taxed at the relevant Income Tax rates. You’ll also pay National Insurance (Class 2 and Class 4) on your self-employed profits.

Cash Basis vs Accruals

You need to choose an accounting method:^[4]

Method	How It Works
Cash basis	Record income when you receive it and expenses when you pay them. Simpler for most small businesses.
Accruals	Record income when you earn it (invoice date) and expenses when you incur them, regardless of when money changes hands.

Cash basis is the default for most sole traders with turnover under £150,000. See our full comparison guide for details.

Reporting on Your Tax Return

Self-employment income is reported on the SA103 supplementary pages of your Self Assessment return. You’ll enter your turnover, expenses by category, and the resulting profit or loss.^[5] From April 2026, sole traders above the MTD threshold will instead submit quarterly updates through compatible software.

Losses

If your allowable expenses exceed your income, you’ve made a trading loss. You can:^[1]

Offset against other income in the same tax year (e.g. employment income)
Carry forward to offset against future profits from the same business
Carry back to the previous year’s income

Cash basis restriction: If you use the cash basis, you can only carry losses forward against the same trade — you can’t offset them against other income.^[4]

Frequently Asked Questions

What counts as trading income for tax purposes?

Trading income includes sales revenue, fees and commissions, tips, payments in kind (taxed at market value), and insurance payouts compensating for lost trading income.

Do I need to pay tax on self-employment income under £1,000?

No. If your total self-employment income is under £1,000 in a tax year, it is automatically tax-free and you do not need to register with HMRC or file a return.

What is the difference between cash basis and accruals accounting?

Cash basis records income when received and expenses when paid. Accruals records income when earned and expenses when incurred, regardless of when money changes hands. Cash basis is the default for most sole traders with turnover under £150,000.

What can I do with a self-employment trading loss?

You can offset a trading loss against other income in the same year, carry it forward against future profits from the same business, or carry it back to the previous year. Under cash basis, losses can only be carried forward.

Sources

Working for yourself — GOV.UK
Expenses if you're self-employed — GOV.UK
Tax-free allowances on property and trading income — GOV.UK
Cash basis — GOV.UK
Self Assessment tax returns — GOV.UK

Trading Income for Sole Traders