Self Assessment: your questions answered

If you’ve ever felt confused or stressed out by Self Assessment, you are definitely not alone. The rules are complicated. That’s why FreeAgent’s Chief Accountant, Emily Coltman FCA, recently held two webinars to demystify the process. If you missed the session for sole traders, or the one for limited company directors - the recordings are both available here.

To offer you even more support to soar through Self Assessment ahead of the 31st January deadline, Emily - an expert in translating accountantese into plain English - has also answered some questions from business owners. Here are her helpful hints…

My business started after 6th April 2024, do I need to file a tax return?

Unless you are already filing tax returns for another reason - such as receiving property rental income - then your first tax return won’t be due for filing until after 5th April 2025. You can breathe a sigh of relief and park it for another year!

Also, if the income from your business is less than £1,000 in the year, you don’t have to fill in a tax return, though you may wish to in order to use any losses your business makes to save yourself some tax. Speak to your accountant for more guidance in that case.

It is a good idea to keep your books in good order so filing your first tax return is as easy as possible. Start keeping track of all your income and costs now and get into the habit of doing your bookkeeping regularly so that your figures are accurate.

HMRC already knows about my income from my job, do I need to include that on my tax return?

The simple answer is yes, you do. Your tax return needs to include all of your taxable income even if HMRC already knows about it. So if you have a salaried job and your employer is reporting your salary to HMRC along with that of all your colleagues, you still need to include your salary on your own tax return because that is where you give HMRC a picture of all of your taxable income together.

Make sure you use your P60 (for your salary and tax taken off) and P11D (for any non-cash benefits you need to tell HMRC about, such as private medical insurance) for the right tax year.

I travel a lot to visit clients. As a sole trader, can I claim the cost of that travel?

This is a very grey area so I would strongly recommend talking to your accountant about how the rules might apply to your particular business.

For one thing, the cost of travel is only allowable for tax - i.e. you can only put it in your accounts and use it to reduce the amount of profit you pay tax on - if the journey is ‘wholly and exclusively’ for the purpose of your business.

In other words, if you make the journey just to visit a client, that’s a good start. But if the journey is both to visit a client and to do your weekly shopping, you’re on shaky ground with claiming the cost of the journey.

Another point is that HMRC is less likely to allow the cost of your journey if your travel is ‘regular and predictable’ - for example, if you visit the same clients at the same time every week.

Do speak to your accountant for more help.

Is there a standard away-from-home allowance set out by HMRC, similar to the home office allowance or pence-per-mile?

HMRC doesn't set an allowance for food and drink when you’re away from home for sole traders. You would need to decide whether the subsistence in question is allowable and then claim the actual cost of it. As a quick reminder, sole traders can’t usually claim the cost of food and drink when they’re travelling on business, unless:

• their business is by nature itinerant, or
• they’re staying away from home overnight on business, or
• the journey in question is outside the normal pattern of their business.

What should I include in my costs for business use of home?

The rules are different here for sole traders and for directors of limited companies so I’ll go over each in turn.

For sole traders working at home, the rules are more generous. You can use a ‘fair and reasonable method’ to work out a percentage of many of your home-running costs - light and heat, rent or mortgage interest, council tax, insurance, cleaning if you have your whole home cleaned, etc. The one cost you can’t include, unless you have a separate supply and use a lot for your business, is water - so unless you are, for example, a dog groomer, you’re unlikely to be able to claim part of your water bills.

As an alternative to working out a percentage of your actual costs, you may be able to claim a flat rate allowance for working at home, which varies with the number of hours you work there each month.

There’s more information for sole traders in our helpful How do I calculate my working from home expenses? infographic.

For employees of limited companies, including directors, the rules are more strict. You can’t even claim any costs for working at home unless what you’re doing there earns money for the company (admin and writing up your books don’t count) and you have to work at home. This could be because, for example, your employer has no suitable office facilities, or your job requires you to be based too far away from the office to travel there to work.

Assuming you can claim anything at all for working at home, you can only claim the costs that are a direct result of you working at home, namely increased energy bills.

There’s more information for limited company directors in our helpful How do I calculate my working from home expenses? infographic.

Do I have to change my year end in 2023/24?

I’m assuming from the question that you’ve been hearing about basis period reform. This legislation means that all sole traders will be taxed on the profits they made in the tax year regardless of when their accounting year ends.

The simple answer is no, you don’t have to change your year end to match with the tax year end on 5th April - you can if you want to, but HMRC hasn’t made this compulsory.

The good news is that whether you do or don’t change your accounting year end, FreeAgent should handle all the calculations smoothly for you!

I’m confused about Class 2 National Insurance - can you explain?

I’ll do my best! Class 2 National Insurance (NI) is a flat weekly rate payable by some sole traders (and partners in partnerships). It protects your entitlement to State Pension and certain other state benefits. You have to have paid (or be treated as having paid) NI for a certain number of years to qualify for the full State Pension, and the NI that qualifies the self-employed for this is Class 2.

If your business’s profits are over the threshold - which is currently set at £12,570 - you must pay Class 2 NI.

If your business’s profits are between the Small Profits Threshold (currently £6,725) and £12,570, then you are treated, for State Pension qualification purposes, as if you had paid Class 2 NI - but you don’t actually have to pay it.

However, if your business’s profits are under the Small Profits Threshold, you won’t be treated as having paid Class 2 NI. If you want to have that year be a qualifying year for State Pension, you can opt to pay Class 2 NI voluntarily.

Who is exempt from paying Class 4 NI? Do you stop paying NI above a certain age?

You’re exempt from paying Class 4 NI if - at the start of the tax year - you’re either under 16 or over State Pension age. You keep paying it until the end of the year in which you attain State Pension age. You also don’t have to pay Class 4 NI in some cases when you’re receiving income on behalf of someone else. HMRC explains that in more detail here.

I’m a sole trader and I also rent out property. Do I need separate FreeAgent accounts?

The short answer is, yes. You’d need a sole trader account to track your business income and costs, and a FreeAgent for Landlords account for your property rental income and costs.

You could then pick which of these two FreeAgent accounts you want to file your tax return from, and copy across the figures for the other account’s Self Assessment pages.

For instance - suppose you opted to file from your sole trader account. You could look in your FreeAgent for Landlords account under Taxes > Self Assessment > choose the year > UK Property, take the figures from there and manually copy and paste the figures onto the corresponding page in your sole trader account, before you file your tax return to HMRC.

If I move abroad, do I still have to fill in a Self Assessment tax return?

That would depend on when you moved and whether you still receive any income in the UK. I’d recommend you speak to either HMRC or to your accountant for more guidance here because this would depend on your personal circumstances.

If you are a company director, do you always need to file self assessment or only if your income is over £100k?

HMRC may well ask you to file a tax return as a company director if you are taking any salary and/or dividends from the company. If HMRC asks you to fill in and file a tax return then you do need to do so or you risk being fined for late or non-filing.

I have recently put my company into voluntary liquidation - can you explain how I claim asset disposal relief?

HMRC gives guidance here on eligibility for, and how to claim, Business Asset Disposal Relief when you sell or close a company.

If I sell things on Facebook Marketplace or Vinted, do I have to note that anywhere on the Self Assessment form?

That might or might not amount to a trade if you are selling goods online as you’ve described. We’ve got a useful article - When does a side hustle become a business that you have to pay tax for? - that might help you decide whether or not your sales through these online platforms amount to a trade.

If my company has not started to generate much income, and therefore it has not paid me, do I fill anything in on my tax return?

If you’ve not yet taken a salary from the company, but you are filling in a tax return, then what I would probably suggest you do initially is fill in a set of Employment pages but leave the salary and tax boxes blank, so that HMRC doesn't think you’ve forgotten to include them. If your tax return is rejected for filing by HMRC’s systems because of this, then remove the Employment pages and try to file again.

Will FreeAgent payroll populate the Self Assessment form automatically?

Yes, if you’re using FreeAgent to run the payroll for your limited company, then your salary and tax from the payroll will show automatically on the Employment pages of your tax return in FreeAgent.

FreeAgent can help…

FreeAgent can help you soar through Self Assessment. Sign up for a 30-day free trial here. Or FreeAgent is included for as long as you have a NatWest, Royal Bank of Scotland, Ulster Bank or Mettle business account (optional add-ons may be chargeable).

For more help, check out our Self Assessment guides and blogs for a variety of useful information. If you’re in any doubt about how to fill in your tax return, you can also talk to your accountant or call HMRC’s Self Assessment Helpline.