MaxGhenis · Oct 2, 2026 · Sep 27, 2026 · Sep 27, 2026 · Sep 27, 2026 · Sep 30, 2026
diff --git a/changelog.d/1880.fixed.md b/changelog.d/1880.fixed.md
@@ -0,0 +1 @@
+- Stopped the trading allowance being deducted on top of expenses already netted out of self-employment profit (ITTOIA 2005 Part 6A). It now gives full relief only where profit is within the allowance, and partial relief when the new optional `self_employment_gross_receipts` input shows that expenses and capital allowances fall short of it. The allowance now starts in 2017-18.
diff --git a/docs/book/programs/gov/hmrc/income-tax.ipynb b/docs/book/programs/gov/hmrc/income-tax.ipynb
@@ -456,7 +456,7 @@
        "      <td>Trading Allowance</td>\n",
        "      <td>Trading Allowance</td>\n",
        "      <td>1000.0</td>\n",
-       "      <td>2005-04-01</td>\n",
+       "      <td>2017-04-06</td>\n",
        "      <td>currency-GBP</td>\n",
        "    </tr>\n",
        "  </tbody>\n",
@@ -484,7 +484,7 @@
        "16  Personal Savings Allowance     Higher Threshold     500.0     2005-04-01   \n",
        "17          Dividend Allowance   Dividend Allowance    2000.0     2015-06-05   \n",
        "18          Property Allowance   Property Allowance    1000.0     2005-04-01   \n",
-       "19           Trading Allowance    Trading Allowance    1000.0     2005-04-01   \n",
+       "19           Trading Allowance    Trading Allowance    1000.0     2017-04-06   \n",
        "\n",
        "             Unit  \n",
        "0    currency-GBP  \n",
@@ -648,8 +648,8 @@
     "trading_allowance_data = {\n",
     "    \"Attribute\": [\"Trading Allowance\"],\n",
     "    \"Type\": [\"Trading Allowance\"],\n",
-    "    \"Value\": [trading_allowance.values_list[-1].value],\n",
-    "    \"Effective Date\": [trading_allowance.values_list[-1].instant_str],\n",
+    "    \"Value\": [trading_allowance.values_list[0].value],\n",
+    "    \"Effective Date\": [trading_allowance.values_list[0].instant_str],\n",
     "    \"Unit\": [trading_allowance.metadata[\"unit\"]],\n",
     "}\n",
     "\n",

diff --git a/policyengine_uk/parameters/gov/hmrc/income_tax/allowances/trading_allowance.yaml b/policyengine_uk/parameters/gov/hmrc/income_tax/allowances/trading_allowance.yaml
@@ -1,8 +1,15 @@
-description: Amount of trading income untaxed per year.
+description: Amount of trading allowance, which relieves trading receipts in place of deducting actual expenses.
 values:
   2005-04-01:
+    value: 0
+    reference:
+      - title: Finance (No. 2) Act 2017 Sch. 3 para. 13 (allowance has effect from 2017-18)
+        href: https://www.legislation.gov.uk/ukpga/2017/32/schedule/3/paragraph/13
+  2017-04-06:
     value: 1_000
     reference:
+      - title: Income Tax (Trading and Other Income) Act 2005 s. 783AD
+        href: https://www.legislation.gov.uk/ukpga/2005/5/section/783AD
       - title: Finance (No. 2) Act 2017 Sch. 3
         href: https://www.legislation.gov.uk/ukpga/2017/32/schedule/3
 metadata:

diff --git a/policyengine_uk/tests/policy/baseline/gov/hmrc/income_tax/allowances.yaml b/policyengine_uk/tests/policy/baseline/gov/hmrc/income_tax/allowances.yaml
@@ -48,14 +48,23 @@
   output:
     trading_allowance_deduction: 500
     taxable_self_employment_income: 0
-- name: Trading allowance partial deduction
+- name: Trading allowance partial deduction with no expenses
   period: 2020
   absolute_error_margin: 0
   input:
     self_employment_income: 5000
+    self_employment_gross_receipts: 5000
   output:
     trading_allowance_deduction: 1000
     taxable_self_employment_income: 4000
+- name: Trading allowance does not stack on a profit already net of expenses
+  period: 2020
+  absolute_error_margin: 0
+  input:
+    self_employment_income: 5000
+  output:
+    trading_allowance_deduction: 0
+    taxable_self_employment_income: 5000
 - name: Property allowance full deduction
   period: 2020
   absolute_error_margin: 0

diff --git a/..._uk/tests/policy/baseline/gov/hmrc/income_tax/allowances/trading_allowance_deduction.yaml b/..._uk/tests/policy/baseline/gov/hmrc/income_tax/allowances/trading_allowance_deduction.yaml
@@ -0,0 +1,127 @@
+# Trading allowance, ITTOIA 2005 Part 6A Chapter 1 (ss. 783A-783AR).
+# self_employment_income is profit after actual expenses. The allowance is an
+# alternative to those expenses (s. 783AI; HMRC BIM86050), so it may only add
+# the part of the £1,000 that actual deductions have not already used.
+
+- name: Sole trader with £25,000 profit gets no allowance on top of expenses
+  period: 2027
+  absolute_error_margin: 0.01
+  input:
+    self_employment_income: 25_000
+  output:
+    trading_allowance_deduction: 0
+    taxable_self_employment_income: 25_000
+    adjusted_net_income: 25_000
+    # (25,000 - 12,570) * 20%
+    income_tax: 2_486
+
+- name: Profit within the allowance, receipts unknown, is fully relieved
+  period: 2027
+  absolute_error_margin: 0
+  input:
+    self_employment_income: 600
+  output:
+    trading_allowance_deduction: 600
+    taxable_self_employment_income: 0
+
+- name: Profit equal to the allowance, receipts unknown, is fully relieved
+  period: 2027
+  absolute_error_margin: 0
+  input:
+    self_employment_income: 1_000
+  output:
+    trading_allowance_deduction: 1_000
+    taxable_self_employment_income: 0
+
+- name: Profit above the allowance, receipts unknown, is taxed as reported
+  period: 2027
+  absolute_error_margin: 0
+  input:
+    self_employment_income: 1_001
+  output:
+    trading_allowance_deduction: 0
+    taxable_self_employment_income: 1_001
+
+- name: Full relief when receipts are within the allowance (s. 783AE-783AF)
+  period: 2027
+  absolute_error_margin: 0
+  input:
+    self_employment_gross_receipts: 800
+    self_employment_income: 500
+  output:
+    trading_allowance_deduction: 500
+    taxable_self_employment_income: 0
+
+- name: Partial relief beats £100 of expenses (s. 783AI)
+  period: 2027
+  absolute_error_margin: 0
+  input:
+    self_employment_gross_receipts: 1_200
+    self_employment_income: 1_100
+  output:
+    trading_allowance_deduction: 900
+    # 1,200 receipts - 1,000 allowance
+    taxable_self_employment_income: 200
+
+- name: Partial relief beats £500 of expenses
+  period: 2027
+  absolute_error_margin: 0
+  input:
+    self_employment_gross_receipts: 1_200
+    self_employment_income: 700
+  output:
+    trading_allowance_deduction: 500
+    taxable_self_employment_income: 200
+
+- name: Actual expenses above the allowance leave no extra relief
+  period: 2027
+  absolute_error_margin: 0
+  input:
+    self_employment_gross_receipts: 25_000
+    self_employment_income: 20_000
+  output:
+    trading_allowance_deduction: 0
+    taxable_self_employment_income: 20_000
+
+- name: The allowance replaces capital allowances as well as expenses
+  period: 2027
+  absolute_error_margin: 0
+  input:
+    self_employment_gross_receipts: 1_500
+    self_employment_income: 1_500
+    capital_allowances: 300
+  output:
+    trading_allowance_deduction: 700
+    # 1,500 receipts - 1,000 allowance, with no capital allowances
+    taxable_self_employment_income: 500
+
+- name: Expenses plus capital allowances above the allowance use the profit method
+  period: 2027
+  absolute_error_margin: 0
+  input:
+    self_employment_gross_receipts: 1_500
+    self_employment_income: 1_200
+    capital_allowances: 900
+  output:
+    trading_allowance_deduction: 0
+    # 1,500 - 300 expenses - 900 capital allowances
+    taxable_self_employment_income: 300
+
+- name: No trading allowance before 2017-18
+  period: 2016
+  absolute_error_margin: 0
+  input:
+    self_employment_income: 600
+  output:
+    trading_allowance_deduction: 0
+    taxable_self_employment_income: 600
+
+- name: Receipts below profit are inconsistent and treated as unknown
+  period: 2027
+  absolute_error_margin: 0
+  input:
+    self_employment_gross_receipts: 500
+    self_employment_income: 1_500
+  output:
+    trading_allowance_deduction: 0
+    taxable_self_employment_income: 1_500
diff --git a/...ne_uk/tests/policy/baseline/gov/hmrc/income_tax/bases/taxable_self_employment_income.yaml b/...ne_uk/tests/policy/baseline/gov/hmrc/income_tax/bases/taxable_self_employment_income.yaml
@@ -49,7 +49,7 @@
   period: 2024
   input:
     self_employment_income: 30000
-    loss_relief: 10000
+    loss_relief: 15000
     capital_allowances: 15000
     gov.hmrc.income_tax.allowances.trading_allowance: 5000
   output:
@@ -63,7 +63,7 @@
     capital_allowances: 10000
     gov.hmrc.income_tax.allowances.trading_allowance: 1000
   output:
-    taxable_self_employment_income: 34000
+    taxable_self_employment_income: 35000
 
 - name: High self-employment income with some deductions
   period: 2024
@@ -73,7 +73,7 @@
     capital_allowances: 30000
     gov.hmrc.income_tax.allowances.trading_allowance: 1000
   output:
-    taxable_self_employment_income: 149000
+    taxable_self_employment_income: 150000
 
 - name: Low self-employment income with low deductions
   period: 2024
@@ -83,7 +83,7 @@
     capital_allowances: 200
     gov.hmrc.income_tax.allowances.trading_allowance: 300
   output:
-    taxable_self_employment_income: 400
+    taxable_self_employment_income: 700
 
 - name: Deductions exceed self-employment income
   period: 2024
@@ -103,7 +103,7 @@
     capital_allowances: 300000
     gov.hmrc.income_tax.allowances.trading_allowance: 1000
   output:
-    taxable_self_employment_income: 499000
+    taxable_self_employment_income: 500000
 
 - name: Decimal values
   period: 2024
@@ -113,7 +113,7 @@
     capital_allowances: 5000.75
     gov.hmrc.income_tax.allowances.trading_allowance: 1000.00
   output:
-    taxable_self_employment_income: 33999.50
+    taxable_self_employment_income: 34999.50
 
 - name: Pre-net self-employment income can override trading allowance deduction
   period: 2024

diff --git a/policyengine_uk/tests/policy/baseline/gov/hmrc/income_tax/charges/child_benefit_hitc.yaml b/policyengine_uk/tests/policy/baseline/gov/hmrc/income_tax/charges/child_benefit_hitc.yaml
@@ -48,5 +48,5 @@
   output:
     child_benefit: 2_337.40
     CB_HITC: [2_337.40, 0, 0, 0]
-    income_tax_pre_charges: [35_142, 4_486, 0, 0]
-    income_tax: [37_479.40, 4_486, 0, 0]
+    income_tax_pre_charges: [35_742, 4_486, 0, 0]
+    income_tax: [38_079.40, 4_486, 0, 0]
diff --git a/policyengine_uk/tests/policy/baseline/gov/hmrc/pensions/pension_contributions_relief.yaml b/policyengine_uk/tests/policy/baseline/gov/hmrc/pensions/pension_contributions_relief.yaml
@@ -20,7 +20,7 @@
   input:
     self_employment_income: 30_000
   output:
-    income_tax: 3_286
+    income_tax: 3_486
 
 - name: £30k self-employment income, £3k private pension contributions
   period: 2023
@@ -30,15 +30,15 @@
     personal_pension_contributions: 3_000
   output:
     pension_contributions_relief: 3_000
-    income_tax: 3286 - 3000 * 0.2
+    income_tax: 3486 - 3000 * 0.2
 
 - name: £60k self-employment income, no private pension contributions
   period: 2023
   absolute_error_margin: 0.01
   input:
     self_employment_income: 60_000
   output:
-    income_tax: 11_032
+    income_tax: 11_432
 
 - name: £60k self-employment income, £6k private pension contributions
   period: 2023
@@ -48,4 +48,4 @@
     personal_pension_contributions: 6_000
   output:
     pension_contributions_relief: 6_000
-    income_tax: 11032 - 6000 * 0.4
+    income_tax: 11432 - 6000 * 0.4
Original file line number	Diff line number	Diff line change
		@@ -0,0 +1 @@
		- Stopped the trading allowance being deducted on top of expenses already netted out of self-employment profit (ITTOIA 2005 Part 6A). It now gives full relief only where profit is within the allowance, and partial relief when the new optional `self_employment_gross_receipts` input shows that expenses and capital allowances fall short of it. The allowance now starts in 2017-18.