Money Tax Smart

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For businesses—whether a sole trader, partnership, or limited company—tax calculations usually start with adjusting the profits. However, there’s an exception for sole traders. If their total income is less than £1,000 in a year, they can use the trading allowance. This means they don’t need to adjust their profits or claim expenses, if their income is under £1,000.

If their income exceeds £1,000, they must either use the trading allowance or deduct actual business expenses to calculate taxable profits.

Partnerships and limited companies can’t use the trading allowance and must follow standard tax rules

Example: Paltish the Motor Mechanic

Paltish, a sole trader motor mechanic, shows a profit of £36,000. She has deducted £2,000 for client entertainment and claimed depreciation. Since these are not allowable for tax, she must add them back to her profit, increasing her taxable income. To find out more contact Money Tax Smart.