The trading allowance is the amount of trading income you can earn each tax year without paying Income Tax on it or telling HMRC about it. From 6 April 2027 it rises from £1,000 to £3,000. Chancellor John Healey announced the change in the Budget on 28 October 2026, and HMRC’s policy paper puts the detail in writing: up to 1.4 million people could benefit, around 400,000 would pay less tax, and around 100,000 would stop needing to report this income at all.

If you freelance on the side of a job, or you are starting out with a few small clients, this is the Budget measure most likely to change what you actually have to do. It does not change anything for the tax year you are in now. It is not law yet. And it does not remove every obligation. This article works through the numbers, the traps, and the decisions, so you can tell which side of the line you fall on.

We read the Budget’s Overview of Tax Legislation and Rates and HMRC’s tax information and impact note on GOV.UK on 4 November 2026, and every figure below comes from those two documents or from the GOV.UK guidance on the allowance itself.

This is general information, not legal or financial advice. If the amount is large or the situation is disputed, get proper professional advice.

What is changing, exactly?

The trading allowance covers trading income and miscellaneous income: self-employment, casual services such as babysitting or gardening, and hiring out your own equipment, such as power tools. The change, set out in paragraph 1.5 of the Budget’s Overview of Tax Legislation and Rates, is short:

2026/27 tax year (now)2027/28 onwards
Trading allowance£1,000£3,000
Self Assessment reporting threshold for trading income£1,000£3,000
Applies fromAlready in force6 April 2027

Two things happen at once. The allowance itself triples, and the reporting threshold rises to match it. That second part matters as much as the first: if your trading income stays within the allowance, you no longer have to declare it or pay tax on it. HMRC’s note says the measure should cut the number of people who have to calculate taxable profits or file a Self Assessment return for this income.

The change still has to pass into law through Finance Bill 2026-27. Until that Bill passes, £3,000 is an announced figure, not a statute. Budgets are rarely reversed on a measure like this, but treat the new figure as the plan, not as a guarantee, and do not act on it until the Bill is through.

The one number that matters: gross income, not profit

The test is gross trading income: the total you received before any expenses or allowances come off. Profit is irrelevant to the threshold. That catches people out, because most freelancers think in profit.

Take a designer who invoices £2,800 in 2027/28 and spends £400 on software and travel. Her gross income is £2,800, which sits under the £3,000 allowance, so the allowance covers all of it and her taxable profit from that work is £0. Under the old £1,000 allowance she would have had £1,800 of taxable profit to deal with, using the allowance, or £2,400 using her actual expenses.

Now take the same designer in a better year: £3,200 of invoices, £400 of expenses. Her profit is still only £2,800, but her gross income is £3,200, which is over the threshold. She has to register for Self Assessment and declare the income, even though her profit is lower than the first designer’s gross. The £3,000 line is drawn on what came in, not on what was left after costs.

If you run two small income streams, add them together before you test the line. There is one trading allowance per person across all of your eligible trades and miscellaneous income, not one per activity. A writer earning £1,800 from articles and £1,500 from selling prints has £3,300 of gross trading income, which is over the threshold, even though each stream on its own is under it.

Allowance or expenses: pick the bigger one

Once your gross income is over the allowance, you still get to use it, but as a deduction instead of a free pass. This is called partial relief: you deduct the allowance from your gross income instead of deducting your actual expenses. You cannot do both.

The choice is arithmetic, and it is worth doing every year because the answer changes with your costs:

Low costs: the allowance wins. You invoice £4,500 and spend £1,200 on expenses. Using the £3,000 allowance, your taxable profit is £1,500. Using your expenses, it is £3,300. The allowance saves you £1,800 of taxable profit. At the 20% basic rate, if your personal allowance is already used by your day job, that is £360 less Income Tax.

High costs: expenses win. You invoice £4,500 and spend £3,600, a heavy year for equipment. Using the allowance, your taxable profit is £1,500. Using your expenses, it is £900. Claiming expenses saves you £600 of taxable profit, or £120 of tax at 20%.

Two rules sit behind the choice. First, the allowance can never create a loss: you cannot deduct more than the income itself. If your expenses are bigger than your income, claim the expenses and keep the loss, because a loss can be carried forward or set against other income in ways the allowance cannot. Second, keep records either way. HMRC’s guidance is blunt that you must keep a record of the income even when no tax is due, and it can charge a penalty if your records are not accurate, complete and readable.

Who still has to register

The higher allowance takes a lot of people out of the system. It does not take everyone out. You still have to register for Self Assessment and file a return if any of these apply:

  • Your gross trading income is over £3,000. The threshold is the trigger, and it is tested on gross income, as above. Register by 5 October in the tax year after the one in which the income arose. For 2027/28 income, that is 5 October 2028.
  • You made a loss and want to claim relief for it. The allowance cannot create a loss, so a loss-making year needs a return.
  • You want to pay voluntary Class 2 National Insurance to protect your State Pension or benefit entitlement.
  • You want to claim Tax Free Childcare or Maternity Allowance based on your self-employed income.
  • You have other income that needs declaring, such as property income over its own threshold, or capital gains. The trading allowance only covers trading and miscellaneous income.

And some income can never use the allowance at all. You cannot use it on trading income from a partnership, on income from a company you or someone connected to you owns or controls, or on income from your employer or your spouse or civil partner’s employer. If your side work is really a second job routed through a company you control, the allowance does not apply to it.

One more point worth knowing: using the allowance lowers the income figure HMRC uses for tax credits, the high income child benefit charge, student loan repayments and the married couple’s allowance. It does not change your income for Universal Credit purposes. If any of those apply to you, the choice between the allowance and your expenses is about more than tax.

What has not changed

The announcement is narrow, and three things people keep assuming are not part of it:

The property allowance stays at £1,000. The Budget papers change the trading allowance only. If you rent out a room or a flat, that separate £1,000 allowance is untouched.

Making Tax Digital is untouched. Nothing in the Budget papers links the higher allowance to MTD for Income Tax. If your qualifying income puts you in the MTD wave, the quarterly update duty still applies. Our MTD guide for the £30,000 wave covers that timetable, and the quarterly update checker shows what is due when.

Your current tax year is unchanged. The 2026/27 allowance is still £1,000, and the 2025/26 Self Assessment return due by 31 January 2027 is filed under the current rules. Do not use £3,000 on a return for a year before 2027/28.

The personal allowance is also unchanged in this Budget, at £12,570. The £380 figure in the headlines deserves a careful read too: HMRC estimates that 400,000 people will pay less tax, by £380 on average. An average is not a promise. The maths behind it is simple enough: each extra £1,000 of allowance shelters £200 of tax for a basic-rate taxpayer, so the extra £2,000 is worth up to £400 a year at 20%. Higher-rate taxpayers save more per pound sheltered, people with little taxable income save less, and anyone whose income was already under £1,000 saves nothing at all.

What to do before April 2027

Nothing in this change needs doing today, and that is the point. The work is bookkeeping and timing:

  1. Track gross income by tax year, not by calendar year. The line is drawn at 5 April. If you are close to £1,000 in 2026/27, the old limit still applies, and a late invoice can push you over it.
  2. Keep records even if you owe nothing. Invoices, bank statements, a spreadsheet of receipts. HMRC requires it, and you cannot prove you stayed under the threshold without it.
  3. Do the allowance-versus-expenses sum at year end. If your expenses are low, the allowance usually wins. If they are high, claim the expenses. Run the numbers before you file, not after.
  4. Check whether anything else forces you to file. Loss relief, voluntary Class 2, Tax Free Childcare, Maternity Allowance, or other income. The allowance only removes the trading-income reason to file.
  5. Watch the Finance Bill. The £3,000 figure becomes law when Finance Bill 2026-27 passes. If anything changes in the Bill, we will update this article.

If you are starting out, the practical effect is simple: from April 2027 you can earn up to £3,000 a year from freelance work or a side hustle without paying tax on it and without filing a return for it, provided nothing else on the list above applies. That is a real reduction in admin for the smallest earners. For established freelancers earning well above the line, the change is worth up to £400 a year at the basic rate (£800 at the higher rate), and only if your expenses are lower than the allowance. Know which one you are before you celebrate.

Frequently asked questions

Do I need to register for Self Assessment if my side income is under £3,000?

From 6 April 2027, usually not, if trading income is your only income that needs declaring and it stays at or under £3,000 gross. Until then the limit is £1,000. You still need to register if you want to claim loss relief, pay voluntary Class 2 National Insurance, claim Tax Free Childcare or Maternity Allowance, or if you have other income to declare.

Is the £3,000 trading allowance based on income or profit?

Income. The test is gross trading income, the total you received before expenses or allowances. A freelancer with £3,200 of invoices and £400 of expenses is over the threshold even though her profit is only £2,800.

Can I use the trading allowance and claim my expenses?

No. You choose one or the other for the same income. Use the allowance when your expenses are lower than £3,000, and claim your actual expenses when they are higher. The allowance cannot create a loss.

Does the £3,000 allowance apply to my limited company?

No. The allowance is for individuals with trading or miscellaneous income. You cannot use it on income from a company you or someone connected to you owns or controls, on partnership income, or on income from your employer.

When does the £3,000 trading allowance start?

6 April 2027, the first day of the 2027/28 tax year. It still has to pass into law through Finance Bill 2026-27. The 2026/27 allowance stays at £1,000, and the 2025/26 return due by 31 January 2027 uses the current rules.

Sources

For the wider Budget picture, see our Autumn Budget 2026 guide for freelancers. For the payment-on-account side of your tax bill, try the payment on account estimator.