The trading and property allowances are each worth £1,000 a year, starting from the 2017/18 tax year. If both apply, this gives a maximum allowance of £2,000.

The government’s aim is to provide simplicity and certainty regarding income tax obligations on small amounts of income from providing goods, services, property or other assets. The Chancellor announced at Autumn Statement 2016 that the trading allowance will also apply to certain miscellaneous income from providing assets or services. This change will reduce the complexity for some individuals who will no longer have to decide if the activity amounts to a trade or not.

For individuals who have income before expenses of over £1,000, the new allowances will allow them to deduct £1,000 instead of claiming for actual expenses. If both allowances are claimed, a basic rate taxpayer could see a tax saying of up to £400 a year.

LITRG recommends that clear guidance is provided covering topics such as: who can use these new allowances; when business records need to be kept; making elections for partial relief; and when HMRC need to be informed about a new trading business or property income.

Anthony Thomas, LITRG chairman, said: ‘Lack of guidance may lead to unnecessary confusion among those likely to benefit most from the new reliefs – people on low incomes who cannot afford professional advice.

‘Clear and detailed guidance must be available as soon as possible and HMRC must publicise these tax reliefs more widely to ensure that people know when and how to claim them. This guidance should clarify what trades and income can benefit from using the trading allowance. It would be helpful in any guidance to provide specific examples including online trading, for example through online auction websites, and advising at what stage HMRC should be notified about a new business.’

LITRG anticipates confusion among universal credit claimants because income that is eligible for these new tax allowances will still need to be reported to the DWP, even though it does not have to be reported to HMRC for tax reasons. The group says it could be easy for universal credit claimants to make genuine mistakes with their financial record-keeping and when reporting their income because of the different treatments of the allowances for universal credit and tax purposes. This leads to a risk of claimants not realising they have to report income to the DWP.

In contrast, income for tax credits will follow the relevant tax rules and so these new allowances will be reflected in tax credit claims. However, LITGR says this could lead to further confusion for claimants of the property and trading income allowance when claimants move from tax credits to universal credit in future years.

Thomas said: ‘There is a particular risk for benefits claimants, as the new rules apply for tax and tax credits only – so the income will still be counted for means-tested benefits purposes unless any separate ‘disregard’ applies and regretfully many will simply be unaware which is a pity.

‘Assuming that income is being correctly reported for means-tested benefits purposes, the DWP should liaise with HMRC when a universal credit claimant is close to the trading and property allowance threshold so that the claimant can be prompted to notify HMRC and pay the correct amount of tax,’ he said.

LITRG also pointed out that the trading and property allowances are fixed sum tax measures and said the level of both allowances will need to be reviewed regularly to ensure that they are not eroded by inflation.