Policy paper

Income Tax: new tax allowance for property and trading income

Updated 17 April 2018

Who is likely to be affected

Individuals with small amounts of income from providing goods, services, property or other assets.

General description of the measure

This measure introduces 2 new annual tax allowances for individuals of £1,000 each, one for trading and one for property income. The trading allowance will also apply to certain miscellaneous income from providing assets or services. These new allowances will take effect from the tax year 2017 to 2018.

Where the allowances cover all of an individual’s relevant income (before expenses) then they will no longer have to declare or pay tax on this income. Those with higher amounts of income will have the choice, when calculating their taxable profits, of deducting the allowance from their receipts, instead of deducting the actual allowable expenses. The trading allowance will also apply for Class 4 National Insurance contribution purposes.

The new allowances will not apply to partnership income from carrying on a trade, profession or property business in partnership.

The allowances will not apply in addition to relief given under the Rent-a-Room Relief legislation.

Policy objective

The new allowance provides simplicity and certainty regarding Income Tax obligations on small amounts of income from providing goods, services, property or other assets.

This measure supports the government’s objective to simplify the tax system and to help the UK become leaders in the digital and sharing economy.

Background to the measure

At Budget 2016, the government announced 2 new £1,000 allowances each for property and trading income to take effect from 6 April 2017.

The government announced at Autumn Statement 2016 that the trading allowance will also apply to certain miscellaneous income from providing assets or services. This change will reduce the complexity for some individuals who will no longer have to decide if the activity amounts to a trade or not.

Detailed proposal

Operative date

For those individuals who choose for simplicity to report their income and expenses of a trade according to the tax year, the trading allowance will take effect for trading income in the period 6 April 2017 to 5 April 2018. Otherwise, it will take effect for periods ending on either, an accounting date or on such other date, on or after 6 April 2017 that forms the basis period for the 2017 to 2018 tax year.

This will take effect for property income and certain miscellaneous income arising from 6 April 2017.

Current law

Chapter 2, Part 2 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) charges Income Tax on the profits of a trade.

Chapter 3, Part 2 contains rules for the calculation of trade profits with reference to the receipts and expenses, to include any allowances or charges under the Capital Allowances Act 2001, and in accordance with generally accepted accounting practice (GAAP), subject to any tax adjustments required by law. This Chapter and Chapter 3A also provides that small businesses can elect for profits to be calculated on the cash basis.

The profits of a trade are taxed by reference to the amount of profit earned in a basis period for the tax year. Chapter 15 of Part 2, sets out the rules to determine the basis period for a tax year, and in general provides this to be a period of 12 months ending with the accounting date in the tax year.

Chapter 3, Part 3 of ITTOIA 2005 charges to Income Tax the profits of a property business arising in the tax year. Profits of a property business are calculated in the same way as the profits of a trade except that the cash basis does not currently apply. The government is consulting on introducing this in Finance Bill 2017.

Chapter 8 (income not otherwise chargeable), Part 5 of ITTOIA 2005 charges Income Tax on miscellaneous income from providing assets and services, not otherwise chargeable.

Part 7, Chapter 1, Rent-a-Room Relief, provides relief for income from the use of furnished accommodation in an individual’s only or main residence. This can include trading income, property income and miscellaneous income. The form of the relief depends on whether the rent a room receipts exceed the individual’s rent a room limit. If it does not, the income is not charged to tax unless the individual elects otherwise. If it does, the individual may elect for an alternative method of calculating the income by deducting the rent a room limit, instead of deducting the actual expenses.

Part 9 of ITTOIA 2005 contains special rules that apply to persons (‘partners’) carrying on a trade in partnership referred to collectively as a ‘firm’ and how the individual partners are taxed on this income.

Proposed revisions

Legislation in Finance Bill 2017 will introduce a new Part of ITTOIA 2005, to give relief for 2 new annual tax allowances for individuals of £1,000 each, a trading allowance and a property allowance.

This will set out the form of the relief, which will depend on whether either the trading or property income exceeds the £1,000 allowance or not. Where the individual’s trading or property income is less than the allowance, full relief will be given so that the income is not charged to tax, unless the individual elects otherwise.

Where the individual’s trading or property income is more than the allowance, the individual may elect for an alternative method of calculating the income, instead of the usual rules that would otherwise apply in calculating the profit of a trade or of a property business or miscellaneous income. The election for the trading or property allowance are made independently and apply for each particular tax year.

The new allowances will apply to all types of property and trading income of an individual but not to partnership income from carrying on a trade, profession or property business in partnership where special rules in Part 9 of ITTOIA 2005 apply.

The trading and property allowance will not apply to income on which rent a room relief is given. It will also not apply, if the alternative method is not elected, but instead the actual allowable expenses are deducted.

Trading allowance

The first chapter of the new Part of ITTOIA 2005 will cover the trading allowance.

This provides for full relief where the receipts that would otherwise have been brought in to account in calculating the profits of the trade for the tax year, are up to £1,000. The effect of the relief will be that the profits from the trade will be nil.

There will be an equivalent rule for certain miscellaneous income, chargeable under Chapter 8 of Part 5, of the Act. This will apply to the extent that the £1,000 trading allowance is not otherwise used against trading income.

There will be an optional alternative method for calculating profits where the receipts from a trade or miscellaneous income are more than £1,000. This will take the form of an election which will apply to the calculation of the profits of all trades for a particular tax year. For trading income, the effect of the alternative method will be to calculate the profits on the receipts that would otherwise have been brought in to account in calculating the profits of the trade for the tax year less the deduction of the £1,000 trading allowance. In calculating the profits, no deduction will be allowed for expenses generally or any other matter. There will be a rule to ensure that the total amount of the trading allowance cannot exceed £1,000, where the individual has both sources of income.

Property allowance

The second chapter of the new Part of ITTOIA 2005 will cover the property allowance. This will provide for full relief where the income arising in the tax year is up to £1,000. The effect of the relief will be that the income and expenses will not be brought in to account when calculating profits of a property business.

There will be an optional alternative method for calculating profits where the relievable receipts of a property business are more than £1,000. This will take the form of an election which will apply to the calculation of the profits from property businesses for a particular tax year. The effect of the alternative method will be that the income receipts are brought in to account only in calculating the profits for the tax year. Any expenses associated with the income receipts will not be brought in to account. In calculating the profit a deduction is allowed for the £1,000 property allowance.

Summary of impacts

Exchequer impact (£m)

2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021
-	-15	-235	-195	-200

These figures are set out in Table 2.1 of Budget 2016 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2016.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

This measure could benefit up to around 700,000 taxpayers depending on the proportion of eligible taxpayers that decide to take up the allowance.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

It is not anticipated that this measure will have any particular impact on any group with protected characteristics.

Impact on business including civil society organisations

The additional one off cost of this measure is expected to be negligible. However, this measure is expected to have a significant ongoing saving for the self-employed and landlord population who will either no longer need to fill in a Self Assessment trading or property return or no longer need to calculate their expenses and/or capital allowances for their Self Assessment or property return due to the allowance(s).

This measure is expected to have no impact on civil society organisations as it only affects businesses or landlords where the proprietor reports their business income through Self Assessment.

It is expected that when the affected population begin the process of preparing their Self Assessment return they will read the guidance relating to the allowance(s) and experience a saving through either not having to file a Self Assessment return or not having to calculate their expenses and capital allowances for their returns. The ongoing cost is estimated to be negligible as they will not experience any further burden beyond that which they experience currently. The Self Assessment guidance with which they would normally engage when filling out their returns will now prompt them that either no return is needed or they can claim the allowance(s) instead of their expenses, depending on their circumstances. The measure intends to support the sharing economy. Estimates of compliance savings are shown in the table below.

Estimated on-going impact on administrative burden (£m)

Ongoing average annual impact	(£m)
Costs	negligible
Savings	19.1
Net impact on annual administrative burden	-19.1

Operational impact (£m) (HM Revenue and Customs (HMRC) or other)

The cost to update HMRC information technology systems for this change is estimated at £260,000. Other operational costs are considered to be negligible.

The operational compliance costs are likely to be negligible.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through information collected from tax returns.

Further advice

Find out about the annual tax-free allowances for property or trading income and if you qualify.