BIM86084 - Example: Partial relief for trading and miscellaneous income
Max works as a music producer for a large record label and has taxable employment income of £50,000 per year on which he pays tax through the PAYE system.
Max supplements his employment income by DJing every Saturday night at a local club. Max has gross income of £1,500 a year from this trade and incurs £300 worth of allowable expenditure. Max was not always as successful in his DJing trade and has losses carried forward of £900. Max’s trading income from self-employment is relevant income.
Max has some contacts in the music industry and hears that a neighbour would like to win an advertising contract with a big record label. Max agrees to introduce his neighbour to a contact in the industry in exchange for payment of £500. This is not a receipt from his trade as a DJ but is treated as miscellaneous income. Max’s miscellaneous income is relevant income.
Max’s total relevant income is £2,000, so full relief cannot apply. Max’s total expenses are less than £1,000, so it is beneficial for him to elect for partial relief to apply.
Max’s relevant income is made up of both trading income and miscellaneous income. Max can decide how he sets the £1,000 allowance for trading and miscellaneous income against his trading income and miscellaneous income provided the total amount he deducts does not exceed £1,000.
Max is seeking to minimise his tax bill for the current year so chooses to set £600 of the allowance against his trading income and £400 against his miscellaneous income. The following table shows how Max’s total profits are calculated based on no election and if he makes an election for partial relief:
| - | No Election (£’s) | Election for Partial (£’s) |
|---|---|---|
| DJing | - | - |
| Losses b/f | (900) | (900) |
| Gross Income | 1,500 | 1,500 |
| Allowable Expenses | (300) | - |
| Trading Allowance | - | (600) |
| Profit | 1,200 | 900 |
| Loss Relief | (900) | (900) |
| Taxable Profit | 300 | Nil |
| Losses c/f | Nil | Nil |
| Misc. Income | - | - |
| Gross Income | 500 | 500 |
| Allowable Expenses | 0 | - |
| Trading Allowance | - | (400) |
| Taxable Profit | 500 | 100 |
| Total Profit: | 800 | 100 |