Tax-Free Side Income Rises to £3,000: Who Benefits and When?

You give lessons at weekends, take on design work or sell products you make yourself. How much of that small business income can be tax-free? The Budget on 28 October 2026 announced an increase in the trading allowance from £1,000 to £3,000. But the higher amount does not apply yet.

This matters to people earning extra income or starting a small venture. Reading the announcement as “anyone can now earn £3,000 without reporting it” could lead you to apply the wrong rule to the wrong year or income source.

When does the £3,000 allowance start?

HMRC’s announcement gives a start date of 6 April 2027, for the 2027/28 tax year onwards. The change is intended to be legislated through Finance Bill 2026–27.

For 2026/27, the existing £1,000 allowance remains the relevant figure. The Budget announcement does not retrospectively increase the allowance for income already earned. You can plan around the announced change, but you cannot use next year’s rule to clear this year’s obligations.

The £3,000 change announced in 2025 concerned the reporting threshold only. This new measure also increases the tax relief itself, alongside the Self Assessment reporting threshold. It therefore goes beyond reducing paperwork.

Does £3,000 mean turnover or profit?

The trading allowance is assessed against your total qualifying income before expenses, rather than the profit left after costs. It is a relief for individuals. It is not a Corporation Tax allowance for your limited company’s turnover or a general addition to the tax-free amount on your salary.

If you have several small activities, you do not receive a separate allowance for each. HMRC’s calculation approach brings the relevant income sources together. Payments arriving through different platforms or bank accounts still need to be considered as part of the year’s total.

What changes for someone earning £2,500?

Example: Assume you receive £2,500 of annual gross income from an eligible personal trading activity, have no other income within the scope of the trading allowance and use the allowance instead of claiming actual expenses.

• 2026/27: £2,500 minus £1,000 leaves £1,500 of trading profit entering the tax calculation.
• 2027/28: Once the announced £3,000 limit takes effect, the same £2,500 could be fully covered, on those assumptions.

The first figure is not a £1,500 tax bill. The Income Tax actually due depends on your other income and personal tax position. Nor does the second figure mean a £3,000 payment from the government: the benefit is relief from tax on qualifying income.

Can I deduct expenses as well?

Under the existing system, you cannot deduct actual expenses as well as the trading allowance from the same income. Claiming expenses may be better when your costs are high. Compare the two methods before choosing one.

HMRC’s eligibility guidance also contains restrictions for partnership income and certain payments from connected companies or employers. Other income can still require a tax return; this increase does not remove every Self Assessment obligation. Keep your income records even when claiming the allowance.

For help reviewing your side income, expenses and the relevant tax year, find out about Leon Advisers’ Self Assessment support.

This article provides general information. The example uses the stated assumptions; the new amount should be considered alongside the final legislation and your circumstances.