Avoid the trading allowance trap
Published: 22 November 2025
You can pay voluntary contributions for up to six previous tax years. This means you don’t have to decide whether to pay them until you’ve worked out your annual profits (see Further information ).
Trading allowance
If your business turnover is low and your business expenses less than £1,000 you might save tax by claiming the trading allowance instead. This reduces your taxable profit by up to £1,000 and applies automatically if your turnover is less than this. If your turnover is greater the allowance must be claimed if you want to deduct it.
If the trading allowance reduces your profit to below the SPT you’d lose the automatic free NI credits. In this situation you can be better off not claiming it.
Example. Emma is a self-employed tutor, which is her only source of income. Her turnover for 2024/25 is £7,200 and her tax-deductible expenses, £500. Emma could choose to claim the trading allowance of £1,000 instead of her expenses. If she did her taxable profits for the year would be £6,700 and she’d lose her entitlement to the free NI credits. Therefore, she shouldn’t claim the allowance. What’s more, as her total income is below £12,570 she isn’t liable to income tax on her profits and so claiming the trading allowance doesn’t save tax.
If your turnover is only slightly more than the lower profits limit for a year and your tax-deductible expenses are less than £1,000, consider claiming the trading allowance instead. But only if doing so reduces your income tax by more than the amount you would have to pay in voluntary Class 2 NI contributions to make the year count towards your state pension.
Claiming the Trading Allowance Could Cost You More Than You Save
The trading allowance sounds like a simple win — but for many self-employed people, claiming it without checking the bigger picture could quietly damage your state pension entitlement.
As Emma's example shows, saving a small amount of tax now could mean losing a qualifying year towards your state pension — a decision that is very difficult to undo later.
Before You Claim the Trading Allowance, Ask Yourself:
✅ Are my profits close to or below £6,725 for 2024/25?
✅ Am I aware of how this affects my NI record and state pension?
✅ Would I be better off not claiming the allowance this year?
✅ Should I consider paying voluntary Class 2 NI contributions at just £3.50 per week?
✅ Have I checked whether my expenses exceed £1,000 — making the allowance irrelevant anyway?
This Is Exactly Where Professional Advice Pays for Itself
A small mistake on your tax return today could mean missing years off your state pension record — and that has a real cost over your lifetime.
Our team can help you:
Review your profits and expenses before you file
Calculate whether claiming the trading allowance actually benefits you
Advise on voluntary NI contributions to protect your state pension
Complete your Self Assessment accurately and on time
Get It Right Before You File
📞 Contact Us to speak with a member of our team about your tax debt today.
The trading allowance is not always the right choice. Let us help you make the decision that is right for you.
