Prop firm tax in the UK

Yes, what a funded trading company pays you counts as taxable income in the UK. Brokers are places where you trade your own cash. A prop firm is different: it's a company that, after you pass its evaluation, pays you part of the simulated trading profits. HMRC has not set out specific guidance for prop firm payout tax UK treatment, so the standard rules on self-employment and casual income apply.

Profits from trading your own live account generally fall under forex trading tax, CFD tax rules or spread betting tax. Capital Gains Tax applies only when your sale of shares, property or other assets brings a profit. You don't buy or sell assets in your own name when you trade a funded account.

Under the GOV.UK guidance on working for yourself, being paid for a service you provide or earning commission means you're likely trading. If you decide where, when and how you work, supply your own equipment and answer for your results, you're probably running a business. When the funded trading you do is regular and organised, payouts usually count as self-employed sole trader income. Under HMRC helpsheet 325, occasional payouts may be treated as casual service income.

If you earn money from self-employment or casual services, each tax year you can get up to £1,000 exempt from tax. This is known as the trading allowance. Since 6 April 2017 it has been available, and it applies to casual payouts as well as sole trader income.

Your gross income decides whether you need to tell HMRC. Gross income is what you would report on your tax return in total, before any allowances or expenses are deducted. Full relief applies when your gross trading income for the year is £1,000 or less. Normally, you don't have to tell HMRC when full relief applies.

Annual gross income above £1,000 lets you claim partial relief, which means deducting the £1,000 allowance from gross payouts instead of deducting actual business expenses. Your deductions can't exceed your income, so you can't create a loss. Where your allowable expenses come to more than £1,000, claiming your actual expenses may suit you better than the allowance.

The £1,000 trading allowance isn't available in a tax year where you have trade or property income from a company owned or controlled by you or by someone connected to you. You also can't use it when your income comes from a partnership you're a partner in, from your employer, or from whoever employs your spouse or civil partner.

Through an annual tax return, HMRC uses Self Assessment to collect Income Tax where tax isn't taken automatically from wages. In the UK, the tax year starts on 6 April and ends on 5 April. If you worked as a self-employed sole trader during that year and made more than £1,000 before tax relief, you must send a tax return.

You must tell HMRC by 5 October whenever you need to complete a return covering the previous tax year. That deadline applies when you've never sent a tax return before, or when you registered earlier but had no return to send for the 2024 to 2025 tax year. After you register, you submit your online return and pay what you owe no later than the 31 January submission deadline.

UK traders use many prop firms that are based overseas. You must file a tax return with HMRC when you have untaxed foreign income or commission. Your return lets you deduct either the £1,000 trading allowance against your gross payouts or your allowable business expenses. You can't claim both, because HMRC doesn't allow it.

Keeping records of your prop firm income is required even when your gross payouts are no more than £1,000 and no tax return has to be sent. HMRC may charge you a penalty if your records are inaccurate, incomplete or hard to read. A penalty can also apply if you don't hold them for the required time.

GOV.UK guidance lists useful records: copies of paper or electronic invoices, a spreadsheet listing your income receipts, and emails that confirm income you received. Also keep statements from the firm that paid you showing how much you got, plus your bank statements and bank deposit records.

Self-employed people must hold on to business records for at least 5 years following the 31 January submission deadline of the tax year in question. Take a 2022 to 2023 tax return sent online by 31 January 2024 as an example: your records have to be kept at least until the end of January 2029. Send a return more than 4 years past the deadline and you must hold your records for 15 months from the day you send it. The UK tax rules are covered here in general terms, and none of this counts as personal tax advice for you.