Self employed losses

[swdirect]

In 2023/2024, I had two self-employed businesses. One made a profit of approximately £24,000, while the other, which I set up a few months ago, will have losses of around £4,000. Can these losses be offset against the profit from the first business to reduce the amount of tax paid?

I'll need to do the accounts soon, as I have now changed the second business to a limited company, and I no longer operate the first business and to complicate things we are being switched to Universal Credit.

 

[Newchodge]

You and all of your self employed businesses are a single legal entity. You enter the figures on the form separately, but the final figures will be total profit or total loss. You pay the tax, not your businesses.

 

[Daybooks]

The need to have your accounts now is just good practice not heightened by wanting to transfer to a limited company.

There are specific rules on how you can relieve losses from a trade but that does not include setting the losses off against profits of another trade.

https://www.gov.uk/government/publications/losses-hs227-self-assessment-helpsheet/hs227-losses-2024

Refer to section 3 and third bullet point which may become applicable next time.

There are sections on the self employed pages to deal with the utilisation of any loss.

 

[Newchodge]

The need to have your accounts now is just good practice not heightened by wanting to transfer to a limited company.

There are specific rules on how you can relieve losses from a trade but that does not include setting the losses off against profits of another trade.

https://www.gov.uk/government/publications/losses-hs227-self-assessment-helpsheet/hs227-losses-2024

Refer to section 3 and third bullet point which may become applicable next time.

There are sections on the self employed pages to deal with the utilisation of any loss.

Why aren't the profits from the profitable business the OP's income?

 

[swdirect]

So it doesn't look like I can offset the loss against trade 1 from trade 2 then, even though these are both under self employment. I might however be able to recover the loss when the company is profitable.

 

[Scalloway]

See para 4.1 Loss set-off against income or income and capital gains

HS227 Losses (2024)

www.gov.uk

 

[Daybooks]

So it doesn't look like I can offset the loss against trade 1 from trade 2 then, even though these are both under self employment. I might however be able to recover the loss when the company is profitable.

You can utilise the loss but it is a little subtle than against the other trade.

If your two trades are separate and thus you complete two separate self employment pages for them, then you cannot offset the loss from one against the other.

However you can still utilise that loss against other income which may include the profit from the other trade, employment income or capital gains. On the self employment pages there will be the losses section where you can decide. I think it is called “Loss set against other income.”

You can carry it forward if desired. Refer to HS227 for your options.

 

[Daybooks]

Why aren't the profits from the profitable business the OP's income?

They are. The relief is just obtained differently than described.

 

[WaveJumper]

Personally I think you would do yourself a big favour by employing the services of an accountant to get you on the straight and narrow, financial speaking of course

 

[swdirect]

I earned £1700 in untaxed bank interest, I presume I can claim £700 of relief as that is other income?

 

[Newchodge]

I earned £1700 in untaxed bank interest, I presume I can claim £700 of relief as that is other income?

You can claim the entire loss from the non-profitable firm, offset against the income you receive from the profitable one. Just read the SA form very carefully and tick the bos that says you wish to claim relief for those losses. @Pi Daybooks was just being pedantic about the exact way in which the offset is achieved.

 

[Paul Kelly ICHYB]

You do not have 2 businesses, you have one - your self-employment. You look at both businesses together and the joint net figures.

How have you declared things on your self assessment returns?

As mentioned, now is a good time to use an accountant.

 

[swdirect]

You can claim the entire loss from the non-profitable firm, offset against the income you receive from the profitable one. Just read the SA form very carefully and tick the bos that says you wish to claim relief for those losses. @Pi Daybooks was just being pedantic about the exact way in which the offset is achieved.

From reading the link someone posted above it looks like I can't claim the loss from the new business against the profit I made from the courier business? as they are 2 seperate trades even though I am self employed in both.

 

[swdirect]

You do not have 2 businesses, you have one - your self-employment. You look at both businesses together and the joint net figures.

How have you declared things on your self assessment returns?

As mentioned, now is a good time to use an accountant.

I have or had a courier business in year 23/24 and also I started a new online retail business, on the self assessment which I haven't submitted yet, it asks you to enter the info seperate for each trade or self employed business I had.

It shows the loss but doesn't take this into account automatically unless I claim loss relief which is where I'm confused, as I'm getting conflicting advice on if I can claim the loss from business 2 against the profit from business 1.

 

[Newchodge]

From reading the link someone posted above it looks like I can't claim the loss from the new business against the profit I made from the courier business? as they are 2 seperate trades even though I am self employed in both.

Technically, you cannot offset the loss from one business against the profit of another one. However, the profit from the successful business is your income. You offset the losses against your income. Same thing, slightly different description. If you look at post #7 @Pi Daybooks says that you can, however they use language that is not clear to the average person.

 

[swdirect]

I have or had a courier business in year 23/24 and also I started a new online retail business, on the self assessment which I haven't submitted yet, it asks you to enter the info seperate for each trade or self employed business I had.

It shows the loss but doesn't take this into account automatically unless I claim loss relief which is where I'm confused, as I'm getting conflicting advice on if I can claim the loss from business 2 against the profit from business 1.

Yeah, the wording is confusing. So on my SA where it says 'Loss from this tax year set-off against other income for 2023-24' I can just put in the full amount of the loss?

Going forward I'll just have the 1 business, which hopefully will make a profit at some point.

 

[Daybooks]

Yeah, the wording is confusing. So on my SA where it says 'Loss from this tax year set-off against other income for 2023-24' I can just put in the full amount of the loss?

Going forward I'll just have the 1 business, which hopefully will make a profit at some point.

I am not being pedantic as @Newchodge suggest as the choice is important as the results are different.

A trade profit of £24k and a trade loss of £4k equates to a trade profit of £24k for tax purposes; not £20k because as stated the trade loss of £4k cannot be offset against the trade profit of another trade. The £4k loss is unused at this point.

The trade profit of £24k is subjected to national insurances (subject to personal allowances). The trade profit of £24k is also subjected to income tax (subject to personal allowances). This can be relieved by using the loss to offset this income to income tax; when it is no longer available to be used in subsequent years. But this will not offset the trade profit subjected to national insurances.

Thus if you offset it against income now – you save on income tax but suffer the national insurance – but if you carry it forward you reduce that trade profit in that year – then potentially save both income tax and national insurance in that year. All things being equal of course and remember taxes interact with each other. Hope that explains why the choice matters.

If you can - do the tax computations before deciding - especially if you can forecast next year.

 

[japancool]

Personally I think you would do yourself a big favour by employing the services of an accountant to get you on the straight and narrow, financial speaking of course

Why do we even bother to have an accounts subforum if the answer to every question is "talk to your accountant"?

 

[Newchodge]

I am not being pedantic as @Newchodge suggest as the choice is important as the results are different.

A trade profit of £24k and a trade loss of £4k equates to a trade profit of £24k for tax purposes; not £20k because as stated the trade loss of £4k cannot be offset against the trade profit of another trade. The £4k loss is unused at this point.

The trade profit of £24k is subjected to national insurances (subject to personal allowances). The trade profit of £24k is also subjected to income tax (subject to personal allowances). This can be relieved by using the loss to offset this income to income tax; when it is no longer available to be used in subsequent years. But this will not offset the trade profit subjected to national insurances.

Thus if you offset it against income now – you save on income tax but suffer the national insurance – but if you carry it forward you reduce that trade profit in that year – then potentially save both income tax and national insurance in that year. All things being equal of course and remember taxes interact with each other. Hope that explains why the choice matters.

If you can - do the tax computations before deciding - especially if you can forecast next year.

Thank you, that is helpful.

 

[Daybooks]

You do not have 2 businesses, you have one - your self-employment. You look at both businesses together and the joint net figures.

If that were the case then there would never be a need to have the facility on the tax returns for more than one self employment page. Whether the business are indeed separate or one is an entirely different matter.

 

[Bobbo]

I am not being pedantic as @Newchodge suggest as the choice is important as the results are different.

A trade profit of £24k and a trade loss of £4k equates to a trade profit of £24k for tax purposes; not £20k because as stated the trade loss of £4k cannot be offset against the trade profit of another trade. The £4k loss is unused at this point.

The trade profit of £24k is subjected to national insurances (subject to personal allowances). The trade profit of £24k is also subjected to income tax (subject to personal allowances). This can be relieved by using the loss to offset this income to income tax; when it is no longer available to be used in subsequent years. But this will not offset the trade profit subjected to national insurances.

Thus if you offset it against income now – you save on income tax but suffer the national insurance – but if you carry it forward you reduce that trade profit in that year – then potentially save both income tax and national insurance in that year. All things being equal of course and remember taxes interact with each other. Hope that explains why the choice matters.

If you can - do the tax computations before deciding - especially if you can forecast next year.

HMRC's manuals e.g. NIM24610 onwards appear to suggest that this is wrong and using the 4k loss in the current year would save on national insurance.
It also suggests that if the other income streams were not self-employed (e.g. if there was an employment and a self-employment) then loss on the self-employment can reduce income tax in the current year but for national insurance purposes the loss would be carried forward to future years.

 

[David Griffiths]

If that were the case then there would never be a need to have the facility on the tax returns for more than one self employment page. Whether the business are indeed separate or one is an entirely different matter.

This is quite correct. You can have two or more separate businesses, each requiring their own set of self emplyment pages. In the unfortuate situation where two of them make losses, you can then choose to relieve those losses in different ways. Combining the results of different self employments on one page could lead to what HMRC see as unusual results for the main class of business, leading to an enquiry. The answer might be simple, but that's best avoided.

 

[David Griffiths]

Unless I've missed it, the full range of options for relieving a trade loss has not been given in previous posts. For trading losses you can

• relieve it against general income in the same or the previous tax year. (That means that it is deducted from your total income after adding it all up, not against a specific single source)
• if the loss is in the first four tax years of that trade, you can carry it back against your income of the three preceding tax years. (This often means that you can carry it back against PAYE income for the year before you started)
• carry it forward to set against future profits of the same trade
• There is also terminal loss relief available to carry back if the loss is in the final 12 months of a trade

So there are lots of options, which need to be considered. There is also a cap on the amount of loss that can be offset against other income, usually £50k or 25% of income, whichever is higher. Any unrelieved loss is carried forward.

If a trading loss is set off and effectively used against other trading income, the profit for Class 4 NIC is reduced as well. If it's set off against non-trade income then the unused loss for Class 4 NIC is carried forward, but easy to overlook.

 

[Daybooks]

HMRC's manuals e.g. NIM24610 onwards appear to suggest that this is wrong and using the 4k loss in the current year would save on national insurance.
It also suggests that if the other income streams were not self-employed (e.g. if there was an employment and a self-employment) then loss on the self-employment can reduce income tax in the current year but for national insurance purposes the loss would be carried forward to future years.

Nice find - thank you. I did run the numbers through the Iris/Taxfiler tax computation and they came up with it not being relieved against national insurance and thus as I described. In other words it takes the trade profit deducts the personal allowance and then applies the NI rates thereon. For income tax it takes the trade profit less the personal allowance and then "loss allowance" then applies the income tax rates. Interestingly it does not show a relief elsewhere for NI on its calculation. I cannot see any option on the self employment pages to obtain a relief against national insurance - so it must be elsewhere. It is unusual for their software to be wrong but I think I read NIM24610 as you do. I'll see if Iris/Taxfiler can shed light on where the claim should go.

 

[Daybooks]

Nice find - thank you. I did run the numbers through the Iris/Taxfiler tax computation and they came up with it not being relieved against national insurance and thus as I described. In other words it takes the trade profit deducts the personal allowance and then applies the NI rates thereon. For income tax it takes the trade profit less the personal allowance and then "loss allowance" then applies the income tax rates. Interestingly it does not show a relief elsewhere for NI on its calculation. I cannot see any option on the self employment pages to obtain a relief against national insurance - so it must be elsewhere. It is unusual for their software to be wrong but I think I read NIM24610 as you do. I'll see if Iris/Taxfiler can shed light on where the claim should go.

It looks like you complete the section "Adjustment to profit chargeable to Class 4 NICs" on the Class 2 & Class 4 NICs pages. Hurrah!

 

[Daybooks]

This is quite correct. You can have two or more separate businesses, each requiring their own set of self emplyment pages. In the unfortuate situation where two of them make losses, you can then choose to relieve those losses in different ways. Combining the results of different self employments on one page could lead to what HMRC see as unusual results for the main class of business, leading to an enquiry. The answer might be simple, but that's best avoided.

Yes a handyman doing gardening and painting, I'd class as one business - but doing say carpentry and then running an online shop selling beauty products I'd class as two separate businesses (other factors to consider too). The roll out of Making Tax Difficult is working. Let's hope Paula doesn't replace Jim and introduce her beloved Horizon to fix the tax gap. She may be otherwise detained.

 

[taxaccountant]

One point has not been mentioned - the different rules applying to the two different bases for accounts preparation.

If accounts are prepared under the (informal) "cash basis" then businesses are only able to carry forward a financial loss to the next available profits. There is NO other option (although this may change in upcoming legislation).

On the other hand if accounts are prepared under the "accruals basis" then losses can be offset against other income (subject to overall restrictions) as discussed above.