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HMRC internal manual

Business Income Manual

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    
Trading Allowance   400
Taxable Profit 500 100
     
Total Profit: 800 100