When it comes to working out your tax and national insurance when you are self employed, it is important to appreciate that the calculation of each of these liabilities if separate. This becomes particularly important when you are trying to work out how to handle your tax losses.

National Insurance When You Are Self Employed

When you are self employed, there are two types of national insurance you need to include when working out your tax bill. These are Class 2 and Class 4 and the rates are:

Class
Rates for tax year 2018/2019
Rates for tax year 2017/2018
Class 2
£2.95 a week
On taxable profits above £6,205
£2.85 a week
On taxable profits above £6,025
Class 4
9% on profits between £8,425 and £45,000
2% on profits over £46,350
9% on profits between £8,164 and £45,000
2% on profits over £45,000

 

National Insurance is an additional tax you pay on top of your income tax so when it comes to tax losses the treatment of national insurance is different to that of income tax.

Tax Losses and Class 4 National Insurance 

Unlike how you can carry back your tax losses against your income tax, when it comes to Class 4 National Insurance you can only carry this loss forward and use it against future profits in your business.

Example:

Graeme makes a profits from his self employment business as follows:

2015/2016 2016/2017 2017/2018
Profit/(Loss) (£25,000) £15,000 £35,000

Here’s how Graeme can use up his trading loss made in 2015/2016 against his future business profits:

2015/2016
Trading Profits £0
Loss C/fwd £25,000
2016/2017
Trading Profits £15,000
Loss relieved (£15,000)
Profits for Class 4 NI 0
Loss B/fwd £25,000
Loss relieved (£15,000)
Loss C/fwd £10,000
2017/2018
Trading Profits £35,000
Loss relieved (£10,000)
Profits for Class 4 NI £25,000
Loss B/fwd £10,000
Loss relieved (£10,000)
Loss C/fwd 0

Graeme has benefitted from a reduction in his Class 4 National Insurance in the two years following the tax year he made a loss.

You must always make sure you keep a record of all your tax losses and how you use them so that you get the full benefit of any losses on your tax return.

Income Tax and Tax Losses

Anita is a Chartered Accountant, turned blogger and creator of the ever popular free Go Self Employed Email Mini Course, which has been completed by hundreds of attendees all over the UK. Using her 10 years experience in accounting, tax and operations for Small Businesses, Anita is on a mission to make finance simple for the self employed, so they can stop stressing about tax & finances and focus on building profitable businesses which will give them the lifestyle they dream of.