The short version of the Self-employment page for sole traders
We are not authorised by HMRC to provide accounting or tax advice. Therefore, FreeAgent’s Support team cannot advise you on how to fill in your tax return correctly or check your figures to see if they are correct, unless they have been calculated by the software. If you’re unsure whether a figure on your tax return is right, please speak to your accountant or to HMRC.
Who should use the short version?
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. If your sales were over £85,000 you’ll need to use the long version.
If your self-employed business is preparing accounts for less than a full year and your annualised sales were under £85,000, you should use the short version.
Annualised sales figures are calculated as a proportion of your sales during the accounting year. For example, if you began trading on 1st January with an accounting year end date of 5th April, 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’ll need to use the long version 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’ll also need to use the long version 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.
FreeAgent will pick the short or the long version for you based on two criteria:
- If you’re including figures for less than a year on your Self-employment page, FreeAgent will pick the long version for you.
- If you’re including figures for a full year, FreeAgent will choose the version depending on your turnover.
If you want to choose to fill in the long version, you can switch at the top of the page.
An overview of the short version in FreeAgent
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. 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 your accounting 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.
To calculate how much you received as coronavirus support grant income to enter in the box below box 9, navigate to the ‘Accounting’ tab, select ‘Reports’, then ‘Show Transactions’. Next, select the correct accounting year 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. The government paid out five SEISS grants and they have advised that box 27.1 for 2020/21 should contain any payments you received, and were entitled to receive, for these in that year.
Please note that if your accounting year does not finish on 5th April, or if you received more than you were entitled to, this may mean that the figure you enter in the box under box 9 and the figure you enter in box 27.1 are not the same.
If you received more in coronavirus support grants than you were entitled to receive and haven’t yet told HMRC about this, you need to report the overclaim on your Main Return. This is the figure you need to pay back in full to HMRC.
For any additional coronavirus support payments that are not SEISS, which you received and were entitled to receive, 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. If you received more than you were entitled to and haven’t yet told HMRC, you’ll also need to report this on your Main Return.
Amounts entered in box 10 and box 27.1 are included in your profit for tax calculation.
In FreeAgent, expense categories are tagged as either allowable or not allowable for tax. The short 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.
To see how FreeAgent has calculated the figures in any of these boxes, filter the Show Transactions report by tax reporting type to see the individual transactions that make up these figures.
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.
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.
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.
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.
Class 2 National Insurance
If your self-employed profits are over the Lower Profits Limit (or Small Profits Threshold for tax years 2021/22 and earlier), you have to pay Class 2 National Insurance contributions (NICs). 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 11th February 2023, for example, you would be liable for Class 2 NICs from Sunday 5th February 2023. If you began self-employment on Sunday 12th February 2023, 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 9th March 2023, for example, your liability would have ended on Saturday 11th March 2023 and you would still have had to pay Class 2 NICs for that whole week.
If your self-employment profits are over the Small Profits Threshold, FreeAgent will automatically calculate your Class 2 NI liability for you based on the number of contribution weeks in the tax year in accordance with HMRC guidance, as shown below. However, you can override this amount if you know it to be incorrect i.e. if you started self-employment mid-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.