Two new tax allowances of £1,000 each should help an estimated 700,000 individuals with small amounts of income from providing goods, services, property or other assets.
There is a £1,000 allowance for trading and miscellaneous income and another £1,000 allowance for income from property.
The new trading allowance will cover all kinds of activities, such as babysitting, gardening and hiring personal equipment like power tools. So, you might have a client with fees from a couple of freelance articles that do not amount to more than £1,000, as well as some short-term rent from letting out a garage for a month or two, also for less than £1,000.
That would provide the individual with up to £2,000 a year of tax-free income. The aim is to make life simpler and more certain for people with a little income from such sources.
The allowances were first announced in the 2016 March Budget with the objective of their being introduced this tax year: 2017/18. The necessary legislation was in the original 2017 Finance Bill but it was dropped from the pre-election Finance Act along with many other provisions.
That said, it seems very likely it will be introduced again if the Conservatives return to a position of power after the election fallout.
Unlike the dividend allowance, which is effectively a nil-rate band, these two new features of the income tax system will be real allowances and remove the reporting requirement if the income and circumstances qualify.
Individuals will not have to declare or pay tax on the income as long as that income – before taking account of expenses – is less than the relevant allowance. For example, if someone’s gross trading and miscellaneous income does not exceed £1,000, it will normally be covered by the allowance.
However, if their income is more than £1,000, taxpayers will have a choice when calculating their taxable profits. They can either elect to deduct the allowance from their gross receipts or they can deduct their actual allowable expenses in the normal way. They can change their choice every year if they wish. The trading allowance will also apply for Class 4 National Insurance contribution purposes.
The new allowances will not cover income from partnerships carrying on a trade or property business, nor will they cover adjustment income or post-cessation receipts. And it will not be possible to claim the allowances on top of the £7,500 rent-a-room relief for letting part of a main residence. For taxpayers who report their income and expenses from a trade based on 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 whatever other date after 5 April 2017 that forms their basis period for the 2017/18 tax year.
Every little helps
These allowances are not big-ticket items but they will be useful for people who have some casual earnings from speaking or writing, and might otherwise easily forget about them. Some people even turn down the chance of earning small but sporadic sums because of the effort of making a return to HMRC about them.
The very occasional Airbnb operator might be pleased by the property allowance, especially if it is from a property that is not their main residence and is therefore not covered by the (much higher) rent-a-room relief.
Some clients might be tempted to get clever with the allowances but they should be aware of the anti-avoidance provisions. Employers will not be able to treat some payments to employees or anyone “connected” to them (broadly speaking, that is a spouse and immediate family) as trading or miscellaneous income. And there are similar provisions aimed at such income where a partner in a partnership or a participator in a close company is the recipient.
That said, it would still be prudent to keep records of this income, as well as associated expenses. You never know whether the income might exceed the £1,000 at some point during the year or you might be subject to an HMRC query.
HMRC does not expect the new allowances to cost the Exchequer a great deal in the current tax year but by 2018/19, the official estimate is that the aggregate tax savings produced by the allowances could be as much as £235m.
Danby Bloch is chairman at Helm Godfrey