Do we pay tax on our trading income?

England and Wales: This page sets out the position in full — corporation tax is reserved to the UK Parliament, so the rules are the same everywhere in the UK. Scotland: the same tax and the same rules, with no difference in principle — corporation tax and income tax are both reserved matters. Northern Ireland: the same position again, for the same reason — reserved, with no difference in principle.

Which trading income is exempt from corporation tax?

Two statutory tests decide whether charity trading income is taxable at all. Primary purpose trading is trading that directly furthers the charity’s purpose — a school’s fees, a hospice’s patient care. It is exempt outright. So is trading carried out mainly by the charity’s own beneficiaries.

The rules are UK-wide, so trustees and treasurers in England and Wales, Scotland and Northern Ireland apply the same tests. This page is about the tax on trading. Whether the trading belongs in a separate company is covered in the funding hub, on deciding whether you need a trading subsidiary.

HMRC also treats some trades as covered by that first test: a trade that is a means of carrying out the primary-purpose trade. Selling craft materials made in a workshop for disabled people is one example.

But the word “ancillary” appears nowhere in the statute. It is HMRC’s own reading of the primary-purpose limb, not a separate rule. Do not present it as one.

Where one trade mixes exempt and non-exempt activity, the split is made on a “just and reasonable” basis. That is narrower than HMRC’s own looser phrase, “a reasonable basis”. The small trading exemption is the exemption for everything else, available only below the small trading limit.

None of this is automatic. Claiming the exemption requires an active claim on the tax return — whether for primary purpose trading, beneficiary trading or the small trading limit. A charity that never makes the claim is exposed, even where its trading stayed comfortably within the limit.

What if trading income goes over the limit unexpectedly?

The exemption can still apply where the charity reasonably expected, in good faith, to stay under the limit and then did not. That let-out rewards exactly the record-keeping a well-run charity already does. HMRC accepts minutes of the budget and forecast meeting, cash flow forecasts, business plans and previous years’ accounts as evidence the expectation was reasonable.

A charity that minutes its budget-setting meeting has a defence if trading income comes in higher than planned. A charity that does not cannot build one afterwards.

The wording is not identical for every structure. For a charitable trust, it is the trustees’ own expectation that matters. For a charitable company, it is the company’s. Do not describe the two as the same.

The same let-out has a second route, which is easy to miss. It applies where total incoming resources come in lower than forecast — a budgeted grant that fell through, say. On that route, a charity can exceed the limit relative to its actual income having done nothing wrong on the trading side at all.

How does the small trading limit work?

The small trading limit is worked out from total income, not trading turnover, and crossing it taxes the whole trade’s profits, not just the excess. The table shows HMRC’s published bands: the most non-primary-purpose trading turnover a charity can have at each level of total income.

Total income for the period	Maximum non-primary-purpose trading turnover
under £32,000	£8,000
£32,000 to £320,000	25% of total income of total income
over £320,000	£80,000

Two mistakes cause almost every misunderstanding of this rule. Both make the limit look kinder than it is.

The first is believing that only the profit above the limit gets taxed. That is how most other thresholds in tax work. This one does not. HMRC’s own worked example is explicit:

“This means the £40,000 turnover exceeds the annual turnover limit (£150,000 @ 25%= £37,500), so profit from the whole of the £40,000 is taxable” — HMRC Charities detailed guidance notes, Annex iv, Example 3, verbatim.

Cross the limit, and the profits of the entire trade become chargeable. Not merely the slice above the line.

The second is testing the limit against trading turnover alone. Total income, for this limit, is every monetary source, including grants, donations and investment income, whether or not that income is itself taxable.

The requisite limit is also a single shared limit. It is tested against trading and other miscellaneous incoming resources together, not trading turnover on its own. A charity with large grant income and modest trading has far more headroom than its trading figures alone suggest.

One gov.uk page gets this wrong. It describes the middle band as a share of “total annual turnover” rather than total income. It also uses a slightly different figure for the lower band. Treat that page as out of date. Work from the statute and HMRC’s own Annex iv guidance instead.

Is sponsorship taxable trading income?

Sponsorship is business income and can be taxable. A straightforward gift sits outside the scope of tax altogether. Which one a payment is turns on what the sponsor gets back. The Gift Aid side of the same line is on which of your income can carry Gift Aid.

HMRC’s own indicators point different ways. A payment where the charity gives nothing beyond an acknowledgement reads as a gift.

A payment tied to a large, prominent display of the sponsor’s logo or colours reads as an advertisement — and so as trading. So does a payment tied to a description of the sponsor’s products. Using the charity’s mailing list, endorsing the sponsor’s products, or giving it exclusive selling rights on the charity’s premises all push the same way.

This is genuinely a judgement area. Most charities close to the line should treat it that way, rather than assume their own preferred label is the one HMRC would apply.

Gift Aid payments from a trading subsidiary

A wholly-owned trading subsidiary can pay its taxable profit up to the parent charity under Gift Aid, but the mechanics are often described backwards. The payment is not treated as a distribution for tax — and that is exactly what makes it deductible against the subsidiary’s profits. If it were a tax distribution, no deduction would be available at all.

It is, however, treated as a distribution for company law. That caps it at the profits available for distribution — a figure that can be lower than the taxable profit shown in the accounts.

Pay more than that cap, and the excess is an unlawful distribution. It gets no tax deduction at all, for accounting periods beginning on or after 1 April 2015. A subsidiary can end up taxed on profits it has already paid away.

The timing has its own trap. The payment must fall within 9 months of the payment date, counting backwards. Not forwards from the year end — though for a standard year-long accounting period the two land on the same date.

The claim itself must then follow within 2 years of the end of the accounting period in which the payment was made. HMRC can allow longer at its discretion.

“Wholly owned by a charity” is defined separately from the definition of “charity” used elsewhere in the same chapter. It also covers a subsidiary owned jointly by several unrelated charities, and a guarantee company with no share capital.

Does exempt trading mean nothing to file?

No. HMRC can still send an exempt charity a notice. The duty to notify chargeability turns on whether the charity is objectively chargeable, not on what it believes. Little published guidance says this plainly.

HMRC’s notice power reaches further than whether a charity owes any tax. It can demand information “otherwise relevant to the application of the Corporation Tax Acts to the company”. So a notice can land on a charity with no liability at all, purely so HMRC can confirm that for itself.

The separate duty to notify HMRC of chargeability is triggered by whether the charity is objectively chargeable, not by what it believes. That duty falls away only where all three of these are true:

• all of the charity’s chargeable income is already taxed at source
• there are no chargeable gains
• the tax payable would be nil

None of this changes which accounting framework or scrutiny regime the parent charity is in. Whether receipts and payments accounts are available turns on the charity’s own gross income — see which accounts to prepare.

That threshold is itself changing: £250,000 for financial years ending before 30 September 2026; £500,000 for financial years ending on or after 30 September 2026. Which audit regime applies is a separate charity-law question again, not disturbed by whether a trade happened to be exempt.

The ordinary duty to send the annual report and accounts within 10 months of the year end also runs regardless of the corporation tax position. The reporting hub’s page on how to file your accounts covers it in full.

The next step, whether you have to register for VAT, is a separate tax on the same trading.

Common mistake: believing only the excess over the limit is taxed

It is a cliff edge. Cross the small trading limit and the profits of the whole trade become taxable — not the turnover, and not merely the amount above the line.

Common mistake: testing the limit against trading turnover, not total income

The limit is worked out from the charity’s total income from all monetary sources, taxable or not. That includes grants, donations and investment income, not trading receipts alone. A charity with large grant income has much more headroom than its trading turnover on its own would suggest.

Common mistake: a trading subsidiary paying its whole taxable profit up to the parent

It looks like the obvious way to shed the tax charge. But the payment is capped by company law at profits available for distribution, which can be lower than the taxable profit. Pay more than that and the excess gets no tax deduction, leaving the subsidiary taxed on money it no longer has.

Worked example

Saltmarsh Trust is a charitable company with a trading subsidiary — its structure is already established elsewhere on this site. Most of Saltmarsh’s own trading is primary purpose, and so falls outside this limit altogether.

The activity that does count is a small non-primary-purpose sideline run directly by the charity itself. It is tested against Saltmarsh’s total income, including its grants — not against trading turnover on its own. That is where a charity of Saltmarsh’s size most often has more headroom than it first assumes.

The subsidiary pays its taxable trading profit up to Saltmarsh under Gift Aid. That payment is deductible against the subsidiary’s corporation tax, on two conditions. It must stay within the profits the subsidiary has available to distribute. And it must be made in time, within the nine-month and two-year windows set out in the Gift Aid payments section.