An introduction for sole traders to the long version of the Self Employment page of the Self Assessment tax return in FreeAgent
This article provides a summary of the long version of the 'Self Employment' page of the Self Assessment tax return and the relevant information required to complete it if you're a sole trader.
Many of these are calculated for you by FreeAgent, and we'll explain how these figures are derived. We'll also show you which boxes FreeAgent calculates provisionally and allows you to edit.
If you're not sure whether any of these figures are correct, particularly the ones that you can edit, speak to an accountant or HMRC, or see HMRC's guidance on the short and long versions of these pages.
Remember: FreeAgent cannot advise you on how to fill in your tax return correctly, nor can we check your figures to see if they are correct, unless they have been calculated by the software. We are not authorised by HMRC to provide accounting or tax advice. If you are in any doubt as to whether a figure on your tax return is right, you need to speak to your accountant or to HMRC.
There are two different versions of the 'Self Employment' pages: the short version and the long version.
Who should use the long version?
If your business is preparing accounts for a full accounting year and your sales during that period were over the VAT threshold, you should use the long version of the 'Self Employment' page.
If your business is preparing accounts for less than a full year and your annualised sales were over the VAT threshold, you should also use the long version of the 'Self Employment' page. Annualised sales figures are calculated as a proportion of your sales during the accounting year. If you began trading on 1st January with an accounting year end date of 5th April, for example, and you made £30,000 sales during that time, your annualised sales would be calculated as £30,000 x 12/3 = £120,000.
If you are using the averaging method for farmers, market gardeners, writers and artists or if you have overlap profits (i.e. profits that the business pays tax on twice) you will have to complete the long version of the 'Self Employment' form.
FreeAgent will pick the short or the long version for you based on your turnover, but if you want to choose to fill in the long version, you can switch at the top of the page.
FreeAgent fills in the boxes on the 'Self Employment' page by taking data from the transactions that you've recorded: invoices, bills, bank entries, expenses, and so forth. If you need to make any changes to these, then you should either change the transactions or post journal entries.
Income and costs
Box 15 is for turnover - income the business has earned during the year, excluding bank interest which, goes in the main return.
Boxes 17-30 show the total business expenses, both allowable and disallowable, in the different categories. The setting ‘Tax Return Box' for a category under Settings > Income and Spending Categories determines which of these boxes it will go into.
If an expense is "disallowable", that means it's not allowable for tax relief, i.e. as a sole trader you can't use that expense to reduce the amount of profit that you pay tax on. An allowable expense is one that can be used to reduce the amount of profit that's going to be subject to tax.
Box 31 is the sum total of boxes 16-30.
Boxes 32-45 show the disallowable expenses in the different categories. If you need to disallow certain expenses, such as some legal fees, you need to set up a new category for these and tag that category as disallowable. Some categories, such as Business Entertaining and Depreciation, are tagged as disallowable by default.
Boxes 49-59 show capital allowances. There are complex rules governing what you can claim for different assets, which may be based on information FreeAgent doesn't have. If you're not sure what figure you can claim here, talk to your accountant.
The rest of the boxes in the 'Self Employment' section tend to be summations (see below for guidance on basis periods and overlap profits), except for boxes 73, 74 and 77-80, which relate to losses.
The basic principle is that if you make a loss for tax purposes in any one year (i.e. if your allowable expenses plus capital allowances, outweighs your income), you may well be able to use that loss to reduce your tax bill in some way.
You may be able to set the loss against other income you've received in the same year (e.g. salary from a job) and claim back tax you've already paid; you may be able to carry the loss back against profits from previous years; or you can carry the loss forward to set against future profits from that trade.
Using a loss to reduce your tax bill is called "loss relief". The rules around when each kind of loss relief can be used are complex, especially as losses can be treated differently for tax and National Insurance. If you've made a loss and you're not sure how you can claim relief on it, speak to your accountant.
FreeAgent will make a provisional calculation for you of losses from earlier years, which it will then bring into the memo under box 73.
It assumes you're carrying all your losses forward. If your accountant advises you as such, you can claim loss relief by making entries into box 78 or 79. Fill these in as directed by your accountant.
A business that makes losses in its early years of trading can only receive loss relief on any pound of loss once. But if it makes profits in its early years of trading, and doesn't have a year end of 31st March, 5th April, or anything in between (1st-4th April), it can end up paying tax twice on the same profit. Profits that the business pays tax on twice are called overlap profits.
Most sole traders prepare their accounts to 5th April each year, to match the tax year. HMRC also treat accounts that end on 31st March or on any of the intervening days as being prepared to match the tax year. So if you prepare your accounts to any day between and including 31st March and 5th April, you can stop reading this now - overlap profits do not apply to you!
BUT if your business does not prepare accounts to any of these dates, for example if you use 31st December as your business's year end, then its profits can sometimes be taxed twice!
The classic situation where this will happen is in the early years of your business's life. HMRC give examples of the calculations for which profits will be taxed twice in that case.
Put the opening and closing dates of your basis period into boxes 66 and 67, if they're different from your accounting period, add any adjustment between the profit of your accounting period and basis period into box 68. Your basis period is the period on whose profits you pay tax. It will usually match your accounting period but in some cases - such as in the early years of your business - it doesn't.
If you have overlap profits to use up this year, you'll need to put these into box 69. We're not supporting this box yet, so unfortunately you won't be able to file your return through FreeAgent if this applies to you. Talk to your accountant if you're not sure.
Any overlap profits to be carried forward - that haven't been used up - go into box 70. Again your accountant should be able to advise here.
You shouldn't need to fill in boxes 71 or 72 unless your accountant tells you to.
If you are a subcontractor in the construction industry, put into box 81 the tax which was taken off your earnings by your contractors. This is because HMRC take this tax into account when working out how much tax you should pay this year - it counts as part of your tax bill, so if you miss it out you'll pay too much tax!
The balance sheet boxes, 83-99, are optional, and whether they should be filled in is open to debate. Some accountants advise they should be filled in so that HMRC don't think you have anything to hide, while others say there's no need to give HMRC more information than you have to. They won't affect the amount of tax you pay, so the choice is yours whether to fill in these boxes.
Class 4 National Insurance exemption
Most sole traders have to pay class 4 National Insurance contributions (NICs), but if you are under 16, over state pension age or not resident in the UK for tax purposes as at the start of the tax year in question, you are exempt from paying class 4 NICs. If this applies to you, select 'Yes' to question 37.
You may sometimes need to adjust the profits on which you're paying class 4 NICs (e.g. if you've used a loss to claim back some tax, and the loss is still available) to save you class 4 National Insurance. Check with your accountant to find out whether this applies to you.
If you are a subcontractor in the construction industry, put into box 38 the tax which was taken off your earnings by your contractors. HMRC take this tax into account when working out how much tax you should pay this year - it counts as part of your tax bill, so if you miss it out you'll pay too much tax!
Class 2 National Insurance
If your self-employed profits are over the Small Profits Threshold, you have to pay Class 2 National Insurance contributions (NICs). Previously, these contributions were payable directly to HMRC, separately from the Self Assessment process. However, for tax returns relating to the 2016/17 tax year onwards, Class 2 NICs are paid through your Self Assessment tax bill instead (with a few exceptions).
Class 2 NICs are usually a flat rate per contribution week or partial contribution week that you're in self-employment (unless you're a share fisherman).
A contribution week is defined as a period of seven days starting from a Sunday (just after midnight) to the following Saturday (just before midnight), so if you started self-employment on Saturday 13 February 2016, for example, you would be liable for Class 2 NICs from Sunday 7 February 2016. If you began self-employment on Sunday 14 February, however, you would be liable for Class 2 NICs from that Sunday.
Once your Class 2 NIC liability has been established, it will continue for as long as you are ordinarily self-employed. This means that you will still remain liable for Class 2 NICs during holiday weeks, weeks when you do not do any self-employed work and weeks when you do not earn anything from self-employment.
If you cease self-employment, your liability to pay Class 2 NICs will end on the Saturday of the week in which you ceased to be self-employed. If you gave up self-employment on Thursday 10 March 2016, for example, your liability would have ended on Saturday 12 March 2016 and you would still have had to pay Class 2 NICs for that whole week.
In most tax years there are 52 contribution weeks. If your self-employment profits are over the Small Profits Threshold, FreeAgent will automatically calculate your Class 2 NI liability for you based on 52 weeks, as shown below. However, you can override this amount if you know it to be incorrect (i.e. if you have been self-employed for fewer than 52 weeks during the tax year).
If your self-employment profits are below the Small Profits Threshold you can still volunteer to pay Class 2 NICS. If you want to do this, select ‘Yes’ in the section shown above and FreeAgent will calculate the amount you owe based on 52 contribution weeks.
FreeAgent is registered with the Financial Conduct Authority under the Payment Services Regulations 2017 (register no. 799763) for the provision of account information services.
Registered in sunny Scotland No. SC316774 - One Edinburgh Quay, 133 Fountainbridge, Edinburgh, Scotland, UK EH3 9QG