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An introduction for sole traders to the short version of the Self Employment page of the Self Assessment tax return in FreeAgent

This article provides a summary of the short 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 the figures on this page 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.

Should I use the short or long version of the 'Self Employment' page?

If your business is preparing accounts for a full accounting year and your sales during that period were under £85,000, you’ll usually be able to use the short version of the 'Self Employment' page. If your sales were over £85,000 you’ll need to use the long version.

If your business is preparing accounts for less than a full year and your annualised sales were under £85,000, you should use the short 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 £16,500 sales during that time, your annualised sales would be calculated as £16,500 x 12/3 = £66,000. If your annualised sales were over £85,000 during that time, you’d need to use the long version.

You will need to use the long version of the 'Self Employment' page 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 also need to use the long version of the ‘Self Employment’ page if you received self-isolation support payments from the government due to coronavirus and treated these as part of your business’s income. These payments are subject to NI but not to tax, and there is a box you need to use to adjust your profits which can only be found on the long version of the ‘Self Employment’ page.

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.

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An overview of the short version of the 'Self Employment' page in FreeAgent

Here's how FreeAgent fills in the boxes on this page, taking data from transactions that you've recorded - invoices, bills, bank entries, expenses, and so on. If you need to make any changes to these, then you should either make changes to individual transactions or post journal entries.

Income

Box 9 is for turnover - the income your business has earned during the year. This figure should exclude bank interest, which you need to record on the main return page. Use box 10 to record any other income your business received during the tax year.

Recording coronavirus support grants

If you received any coronavirus support grants during the tax year and explained these in FreeAgent as ‘Other Money In’ and ‘Grant Income’, enter the amount you received in the box below box 9. This will subtract the grants from your turnover.

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To calculate how much you received as coronavirus support grant income, navigate to the ‘Accounting’ tab, select ‘Reports’, then ‘Show Transactions’ and choose ‘Grant Income’. Add up all of the coronavirus grants to calculate your grant income total.

To record your grant income, you will then need to enter the total for any SEISS grants in box 27.1.

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For any additional coronavirus support payments that are not SEISS, navigate back to the ‘Business Income’ section and enter them in box 10, along with any other income your business received during the tax year.

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Costs and capital allowances

In FreeAgent, expense categories are tagged as either allowable or not allowable for tax. The short 'Self Employment' form includes only transactions in categories that are tagged as 'allowable' (i.e. they can be used to reduce the amount of profit that's subject to tax). Boxes 11-19 show the total allowable business expenses in each category. Box 20 is the sum of boxes 11-19.

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Boxes 23-26 show capital allowances. There are complex rules governing what you can claim for different assets, which are based on information that isn’t recorded in FreeAgent. If you're not sure what figure you can claim here, talk to your accountant.

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Losses

Boxes 28, 29 and boxes 32-35 refer 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 outweigh 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 put under box 28, and bring into the memo under box 35.

It assumes you're carrying all your losses forward. If your accountant advises you differently, you can change this figure. Use box 33 or 34 to claim loss relief, as directed by your accountant.

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A business that makes losses in its early years of trading can only receive loss relief on any pound of loss once.

However, if the business 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!

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.

CIS deductions

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 takes 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 £6,205 or more a year, you have to pay Class 2 National Insurance contributions (NICs). 

Class 2 NICs are usually payable 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 2021, for example, you would be liable for Class 2 NICs from Sunday 7 February 2021. If you began self-employment on Sunday 14 February 2021, 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 2021, for example, your liability would have ended on Saturday 12 March 2021 and you would still have had to pay Class 2 NICs for that whole week.

HMRC guidance advises to include 53 weeks’ worth of contributions unless the tax year lasts 52 weeks to the day, which 2020/21 does not. If your self-employment profits are £6,205 or more, FreeAgent will automatically calculate your Class 2 NI liability for you based on 53 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 53 weeks during the tax year).

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If your self-employment profits are below £6,205 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 53 contribution weeks.

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