Tax-free in Britain, taxable in America: the trading allowance and your US return

Figures relate to tax year 2026 (US) · 2026-27 (UK)

Britain lets you earn £1,000 a year from a side hustle without paying tax or telling HMRC. America has no such rule. That gap is the whole story of trading allowance US tax reporting: the same craft sales or tutoring fees can vanish from your British return and still land on your American one.

So if you are an American in Britain with a small side income, you may owe the IRS something even when HMRC is owed nothing. Usually the bill is modest. Still, the paperwork is not optional, and the self-employment tax can surprise people.

This guide covers the British allowance for the 2026-27 tax year, the US rules for 2026, and the rise to £3,000 that HMRC has announced for April 2027. It uses worked examples with the arithmetic shown, so you can swap in your own figures.

Key takeaways

• The trading allowance is £1,000 of gross trading income for 2026-27, and it rises to £3,000 from 6 April 2027.
• Trading allowance US tax treatment does not match: the IRS has no equivalent, so the profit still goes on Schedule C.
• US self-employment tax applies once your net earnings from self-employment reach $400.
• The totalisation agreement can move you out of US self-employment tax, but you need paperwork to prove it.
• The foreign earned income exclusion can cut income tax on the profit, but never self-employment tax.
• If the allowance wipes out British tax, there is no foreign tax credit to claim.
• Since 1 January 2024, UK platforms report many sellers' income to HMRC each January.

What is the trading allowance?

The trading allowance is a British tax relief that makes the first £1,000 of gross trading income tax-free in each tax year. It covers small sales of goods and casual services, such as selling crafts online, tutoring or dog walking. If your gross income stays at £1,000 or less, you need not report it at all.

Note the word gross. The test looks at your takings before any costs, not your profit. So a seller who takes £1,200 and spends £400 on materials is over the limit, even though the profit is only £800.

Also, the £1,000 is one allowance per person, not one per activity. Tutoring income and craft sales add together. Then the total decides whether you are inside the allowance or not.

Why does the trading allowance US tax gap catch Americans out?

Because America taxes its citizens on worldwide income and has no allowance of its own for small trading income. HMRC may treat £900 of craft sales as if it never happened, but the IRS still wants the gross receipts, the expenses and the profit. In practice, many Americans here assume that silence from HMRC means silence from the IRS.

The two systems also measure different things. Britain lets you deduct a flat £1,000 instead of your real costs. America lets you deduct only real, ordinary business costs, and only on Schedule C.

So under trading allowance US tax rules, the British figure and the American figure for the same side income will rarely agree. That is normal, and it is not an error on either return. What matters is that each return follows its own rules.

How does the IRS see the same side income?

The IRS treats it as income from a trade or business, reported on Schedule C of Form 1040. You list your gross receipts, subtract actual costs such as materials, postage and platform fees, and arrive at a net profit. That profit then feeds into income tax and, if large enough, self-employment tax.

There is no line on Schedule C for a British allowance, and no flat deduction to replace your costs. So keep receipts for everything, even if HMRC never asks to see them. You will need them for the American return.

Also, convert pounds to dollars in a consistent way. Many people use the IRS yearly average rate for the whole year. Whatever you pick, use the same method every year.

One more difference is the calendar. The British tax year runs from 6 April to 5 April, while the American year runs from January to December. So a sale in February 2027 falls in the 2026-27 British year but the 2027 American year.

Full relief or partial relief: which applies to you?

HMRC guidance describes two forms of the allowance. Full relief applies when your gross trading income for the year is £1,000 or less. In that case the whole amount is tax-free and you do not report it, although you should still keep records.

Partial relief applies when gross income goes over £1,000. Then you can choose to deduct £1,000 instead of your actual expenses. You cannot claim both. So if your real costs are higher than £1,000, you will usually do better claiming expenses instead.

However, the American return never gets this choice. Whatever you pick in Britain, Schedule C still uses real expenses. So under partial relief your British profit and your American profit can differ by hundreds of pounds.

Worked example: a candle seller with two different profits

The figures below are illustrative. Take an American in Leeds with a full-time British salary who makes and sells candles online. For the 2026-27 tax year, she takes £2,400 in sales and spends £600 on wax, jars and postage. For simplicity, assume the same figures fall in calendar 2026 and an exchange rate of $1.30 to £1.

On the British side, she is over £1,000, so full relief is gone. With partial relief, her taxable profit is £2,400 minus £1,000, which is £1,400. With actual expenses, it would be £2,400 minus £600, which is £1,800. So the allowance is better, and her salary has already used her £12,570 personal allowance.

Next, the tax. At the 20% basic rate for 2026-27, £1,400 gives British tax of £280. Her profit is below the £12,570 Class 4 threshold, so there is no Class 4 National Insurance.

On the American side, she reports gross receipts of $3,120 and expenses of $780 on Schedule C. That leaves a profit of $2,340. Her British tax of £280 is about $364, which she can claim as a foreign tax credit against the US income tax on that profit.

Notice that the American profit is about $520 higher than the British one converted. That gap comes entirely from the allowance. Also, the foreign tax credit covers income tax only. Self-employment tax needs a separate fix, covered below.

Second example: when British tax disappears completely

Again, the figures are illustrative. A retired American in Bath walks dogs and earns £900 in 2026-27, with £100 of costs for leads and treats. Because gross income is under £1,000, full relief applies and she reports nothing to HMRC.

But the IRS still sees $1,170 of gross receipts and $130 of costs at $1.30 to £1. So her Schedule C shows a profit of $1,040. That is above $400, so she owes self-employment tax unless she can show British coverage.

At 15.3%, the self-employment tax would be at most about $159, since Schedule SE applies the rate to slightly less than the full profit. Then there is income tax on top, depending on her other income. And because she paid no British tax, there is nothing to credit against either charge.

Does self-employment tax apply to a small side income?

Yes, once your net earnings from self-employment reach $400 in the year. According to the IRS, that threshold also forces you to file a US return, even if your total income is below the normal filing level. The rate is 15.3%, made up of 12.4% for social security and 2.9% for Medicare.

The social security part stops at a wage base of $184,500 for 2026, so it never caps a side income. Instead, the whole profit above the threshold bears the charge. For a small earner, that can easily exceed the American income tax on the same profit.

Also, you work out the charge on Schedule SE, not Schedule C. Half of it, the employer-equivalent portion, then comes off your income for income tax purposes. That deduction does not reduce the self-employment tax itself.

Can the totalisation agreement remove US self-employment tax?

Often, yes. Britain and America have a social security agreement so that you pay into only one system for the same work. IRS Publication 54 says that, as a general rule, a self-employed person subject to both systems is covered only by the country where they live. For an American living in Britain, that points to Britain.

But the IRS wants proof. Its guidance says to get a certificate of coverage from the foreign agency, here HMRC. If the foreign agency will not issue one, you can ask the US Social Security Administration for a statement instead. Then you attach a copy to your return each year and write that you are exempt on the self-employment tax line.

A side income below £12,570 may mean you pay no British National Insurance at all. In our practice, we still treat the agreement as assigning you to Britain, but the paperwork matters more in that case. Our guide to the certificate of coverage from HMRC explains the application and how to reclaim past years.

Does the foreign earned income exclusion help?

It helps with income tax, not self-employment tax. Side income from your own work counts as earned income, so it can qualify for the exclusion if you meet the residence or presence test. However, IRS guidance is clear that the exclusion does not reduce self-employment tax. So the $400 test still bites.

For most Americans here with a British salary, the foreign tax credit already removes US income tax on wages. Electing the exclusion just for a small side income rarely adds much. It can also limit other credits and affects later years, so weigh it before you tick the box.

Where the exclusion does help is the retired or non-working spouse with only a little trading profit and no British tax. There, it can reduce US income tax to nil. But self-employment tax still needs the totalisation route.

Why is there no foreign tax credit when the allowance covers everything?

Because a foreign tax credit can only give back tax you actually paid abroad. If full relief makes your trading income tax-free in Britain, HMRC charges nothing, so there is nothing to carry across. The IRS then taxes the profit as if it came from a country with no income tax at all.

Under partial relief, some British tax usually arises, so a credit exists. But it covers only the British tax on the reduced profit. Because the US profit is higher, the credit may not cover the full US charge on the side income.

Credits from your salary can help, though. British income tax on wages is often higher than the US tax on those wages. Then the unused credit, in the same income category, can sometimes absorb the US tax on the side profit. That depends on how the income is sourced and grouped, so check it on Form 1116.

When must you register for Self Assessment?

You must register once your gross trading income for the tax year goes over £1,000. For the 2026-27 year, that means registering by 5 October 2027 and filing online by 31 January 2028. You must also register below £1,000 in some cases, for example to claim a loss.

HMRC guidance lists other reasons to register even at low income. These include paying voluntary Class 2 National Insurance, claiming Tax-Free Childcare as a self-employed parent, or claiming Maternity Allowance based on self-employment.

Voluntary Class 2 is worth a thought for Americans who plan to retire here. For 2026-27 it costs £3.65 a week when profits are below £7,105. Our guide on how to register for Self Assessment walks through the steps and deadlines.

When can you not use the trading allowance?

You cannot use it on income from your employer, or from your spouse's or civil partner's employer. You also cannot use it on income from a company or partnership that you, or a connected person, own, control or belong to. Partnership trading income never qualifies.

For example, say your employer pays you separately to tutor its staff's children at weekends. That income comes from your employer, so the allowance does not apply. Also, if you invoice your spouse's limited company for design work, the connected-party rule blocks it.

These rules stop people turning salary or company profits into tax-free side income. On the American side, none of this matters for Schedule C. You report the income in the same way whether or not Britain allows the relief.

What about the £1,000 property allowance?

The property allowance is a separate £1,000 for gross property income, such as renting out a parking space or a room for occasional lets. You can have both allowances at once. Joint owners each get their own £1,000 against their share of the rent, but the allowance cannot create a loss.

There are limits. You cannot use the property allowance alongside Rent a Room relief on the same income, or with the finance-cost tax reducer for a residential mortgage. Our guide to Rent a Room relief and US tax covers the lodger case.

America has no property allowance either. So rent goes on Schedule E with real expenses and depreciation, whatever HMRC allows. Rental profit does not usually attract self-employment tax, which is one real difference from trading income.

Will platforms report your sales to HMRC?

Very likely, if you sell through a UK platform. Since 1 January 2024, digital platforms collect seller details and report each calendar year's earnings to HMRC by the following 31 January. Goods sellers with fewer than 30 sales and no more than 2,000 euros, about £1,700, are not reported. Services sellers have no such exemption.

You should get a copy of what the platform sends. GOV.UK guidance stresses that a report does not automatically mean you owe tax. Selling unwanted things from your loft is unlikely to be trading at all.

But the report uses calendar years, while the allowance uses tax years. So a seller near the £1,000 line should keep their own records by tax year. Then if HMRC asks about a platform figure, you can show how it maps onto 6 April to 5 April.

Will you get a Form 1099-K?

Possibly, if you sell through a US platform or payment app. The IRS says these services must report when payments for goods or services exceed $20,000 across more than 200 transactions. That is the current IRS threshold, and most small British side hustles stay well below it.

As a US citizen, you cannot certify foreign status on Form W-8BEN, so a US platform will treat you as a US person. Card processors can issue a 1099-K whatever the amount. Either way, you report all business income, with or without a form.

Our guide to Form 1099-K for online sellers explains what to do when the form shows personal sales or the wrong figures.

Is your side income a hobby or a business?

It depends on whether you aim to make a profit. The IRS weighs factors such as whether you keep proper records, change methods to improve results, and rely on the income. If you have no profit motive, the income is hobby income and goes on Schedule 1, line 8, rather than Schedule C.

GOV.UK takes a similar view from the other side. If you make or buy goods to sell at a profit, you are likely to be trading. Selling your own used things is usually not trading.

So most people selling handmade crafts or paid services regularly are running a small trade on both sides. Occasional selling of personal items is different. In that case neither the allowance nor Schedule C may come into it.

What changes when the allowance rises to £3,000?

The Budget on 28 October 2026 announced that the trading allowance will rise from £1,000 to £3,000 from 6 April 2027, for 2027-28 onwards. The Self Assessment reporting threshold for trading income rises to £3,000 at the same time. The change needs legislation in the Finance Bill 2026-27.

For trading allowance US tax purposes, the rise widens the gap. More side income will disappear from the British return, while the American rules stay the same. So more people will owe US tax with no British tax to credit.

The announcement covers the trading allowance only. At the time of writing, the property allowance stays at £1,000. Check the final legislation before planning around either figure.

How to report a small side income on both returns

1. Total your gross trading income for the UK tax year, from 6 April to 5 April, across every activity.
2. If it is £1,000 or less in 2026-27, apply full relief and keep your records.
3. If it is more, register by 5 October and compare the £1,000 deduction against your real expenses.
4. Separately, total your gross receipts and actual expenses for the US calendar year in dollars.
5. Complete Schedule C, then Schedule SE if net earnings reach $400.
6. Apply to HMRC for a certificate of coverage, or keep proof that you applied.
7. Claim a foreign tax credit for any British tax paid, and check whether salary credits cover the rest.

Common mistakes with trading allowance US tax reporting

• Leaving side income off the US return because it was under £1,000 and tax-free in Britain.
• Putting the £1,000 trading allowance on Schedule C as if it were an expense.
• Using profit instead of gross income to test the £1,000 limit.
• Forgetting that tutoring and craft sales share one allowance.
• Assuming the foreign earned income exclusion removes self-employment tax.
• Paying US self-employment tax for years without asking HMRC for a certificate.
• Mixing calendar-year platform totals with tax-year allowance figures.

In our practice, the most common error is the first one. A client stays below £1,000 for years, files nothing, and then finds a US return with missing Schedule C income. The fix is usually simple, but it is easier before the IRS notices.

How US UK Tax Accountants helps

We look at trading allowance US tax questions on both sides at once. That means checking whether the trading allowance applies, choosing full or partial relief, and matching the figures to Schedule C and Schedule SE. Our UK Self Assessment service covers registration and the British return.

We also apply for the certificate of coverage where it saves you self-employment tax, and we amend past US returns where income was missed. If you have a side hustle and are unsure what the IRS expects, contact us for a fixed quote.

Last reviewed 12 November 2026. This article is general information and is not personal tax advice. Figures for the UK refer to the 2026-27 tax year and US figures to 2026 unless stated.