Does the trading allowance reduce taxable overall income?

MW92
MW92 Posts: 8
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Hello, I would like to know if the trading allowance reduces my overall taxable income. For context here's my situation:
  • PAYE income: £55,000
  • Side hustle income: £2,000
My wife receives Child Benefit and I utilise Marriage Allowance. To keep the full amount of these benefits I salary sacrifice £5,000 via my PAYE employment into my pension, bringing my PAYE taxable income down to £50,000.

However, I realise that when I factor in my side hustle income, my overall income is pushed back up to £52,000 and thus I will start to loose these benefits. To avoid this I'm keen to make further pension contributions to bring my overall taxable income back down to £50,000. 

This is where the trading allowance comes in - I want to know if this allowance effectively subtracts £1,000 off my side hustle income (bringing my overall taxable income to £51,000) and I only have to pay £1,000 into my pension or if it's treated the same way as the personal allowance where I'm not taxed on the £1,000 but it still counts towards my overall taxable income (in which case I need to pay £2,000 into my pension).

Any help is appreciated... I've gained a few extra grey hairs over this one!
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  • Dazed_and_C0nfused
    Dazed_and_C0nfused Posts: 12,809
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    You are over thinking this.

    Your self employed "income", whatever you actually mean by that isn't relevant.

    It's your taxable profit which counts.

    So you need to say what that is.

    Don't forget you need to include all taxable income, even if taxed at 0% like some interest and dividends can be 
  • MW92
    MW92 Posts: 8
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    Thank you for your response - I don't have any expenses as my side hustle income is solely from paid for surveys (so utlising a laptop I already have and that's about it), therefore I class my whole side hustle earnings as taxable profit. 

    I'm aware interest is also added to taxable income (I have a spreadsheet that tracks everything) but for the purpose of this post I'm trying to keep it straightforward 
  • Dazed_and_C0nfused
    Dazed_and_C0nfused Posts: 12,809
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    MW92 said:
    Thank you for your response - I don't have any expenses as my side hustle income is solely from paid for surveys (so utlising a laptop I already have and that's about it), therefore I class my whole side hustle earnings as taxable profit. 

    I'm aware interest is also added to taxable income (I have a spreadsheet that tracks everything) but for the purpose of this post I'm trying to keep it straightforward 
    If you don't have any expenses then why wouldn't you make use of the trading allowance 🤔.

    Understand wanting to keep it simple but by ignoring the interest you risk both ending up with a (possibly small) HICBC liability and loss of Marriage Allowance.
  • MW92
    MW92 Posts: 8
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    Sorry but I think you have missed the point of my post (it took me a while to draft it as I didn't know how best to word it!). My question is not whether I should use the trading allowance or not (its a given that I should) but whether the trading allowance reduces my overall taxable income by £1,000 or if I'm taxed on it the same way as the personal allowance whereby tax is effectively 0% but the £12,570 still counts towards my overall taxable income. 


  • Dazed_and_C0nfused
    Dazed_and_C0nfused Posts: 12,809
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    MW92 said:
    Sorry but I think you have missed the point of my post (it took me a while to draft it as I didn't know how best to word it!). My question is not whether I should use the trading allowance or not (its a given that I should) but whether the trading allowance reduces my overall taxable income by £1,000 or if I'm taxed on it the same way as the personal allowance whereby tax is effectively 0% but the £12,570 still counts towards my overall taxable income. 


    Your posts are contradicting each other though

    therefore I class my whole side hustle earnings as taxable profit. 

    whether I should use the trading allowance or not (its a given that I should)

    Calculation of your income tax liability and HICBC all starts from your taxable income so you need to have decided what that is.

    For the self employment is it £2,000 or £1,000 🤔
  • MW92
    MW92 Posts: 8
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    I can only say sorry for the confusion... its clear in my head but getting it down on paper is another thing!

    My taxable income from self employment is £2,000. As I understand it the trading allowance means the first £1,000 of this income is tax free. Therefore, when calculating my overall taxable income (from PAYE, self employment interest earning etc.) does the trading allowance subtract £1,000 from the headline figure?

    So from the example in my post I earn £55,000 via PAYE and £2,000 from self employment (forget about pension contributions for the time being) - when using the trading allowance is my overall taxable income £57,000 (£55,000 + £2,000) or £56,000 (£55,000 + £2,000 - £1,000 TA)?
  • Dazed_and_C0nfused
    Dazed_and_C0nfused Posts: 12,809
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    Have you tried looking at the return itself?

    If your turnover is £2,000 and you claim the trading allowance of £1,000 then your profit cannot possibly be £2,000.  It would be £1,000.

    Your figures are more complicated they they should be.

    For most people HICBC is simply a case of adding up all taxable income (turnover is NOT taxable, profit is) then deducting Gift Aid contributions and relief at source pension contributions (the gross contribution).  End result is your ANI (which HICBC is based on).

    You cannot deduct net pay or salary sacrifice pension contributions.  This is because they have already been factored in when establishing your taxable income so if you deducted them they would be double counted.
  • Ferro
    Ferro Posts: 132
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    I’m not sure how else it can be put across but, if the trading allowance is claimed (and why wouldn’t it?) there is no £2000 from self-employment. Its £1000!
  • MW92
    MW92 Posts: 8
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    Have you tried looking at the return itself?
    I've never had to submit a return so I'm trying to get my ducks in a row for the next financial year. 
    If your turnover is £2,000 and you claim the trading allowance of £1,000 then your profit cannot possibly be £2,000.  It would be £1,000.
    Ok, so again lets completely forget about pension contributions and assume I contribute £0 and also assume I don't earn any taxable interest, no benefits in kind etc., based on this my taxable income would be £56,000 (£55,000 PAYE + £1,000 self-employment)? 
    You cannot deduct net pay or salary sacrifice pension contributions.  This is because they have already been factored in when establishing your taxable income so if you deducted them they would be double counted.
    I completely understand how pensions work and was not really relevant to my question, other than to give context to my situation and my aim to get my adjusted net income below the HICBC threshold.

  • MW92
    MW92 Posts: 8
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    I’m not sure how else it can be put across but, if the trading allowance is claimed (and why wouldn’t it?) there is no £2000 from self-employment. Its £1000!
    Thank you for your response - I think this answers my question then. So in terms of the HICBC and Marriage Allowance I need to contribute £1,000 to my pension in order to avoid loosing the benefits? 

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