Income from self-employment: formula sheet

Key formulas

Badges of trade

Subject matter | Frequency | Length of ownership | Supplementary work | Reason for sale | Profit motive | Acquisition

Indicators only. Weigh them together. No single badge is decisive. Some lists add other factors, so use the facts you are given.

Trading income basic computation

Accounting profit ± tax adjustments − capital allowances = taxable trading profit

Adjustment of profits and capital allowances are covered in their own topics.

Income tax normal rates

Basic 20% on £1 – £37,700; higher 40% on £37,701 – £125,140; additional 45% above £125,140

Trading profit is non-savings income and uses the normal rates. These are the rates ACCA provides.

Class 4 NIC

Nil to £12,570; 6% on £12,571 – £50,270; 2% above £50,270

Applies to the profits of the self-employed. A capital gain does not bear Class 4.

Tax-adjusted trading profit

Net profit per accounts + disallowable expenditure − non-trading or non-taxable income − capital allowances = tax-adjusted trading profit

Capital allowances are usually deducted after the adjustment of profits. Many answers show them as a separate line.

General deduction test

Allowable only if wholly and exclusively for the trade, and revenue in nature

Mixed private and business use means the private part is disallowed.

Private use by the owner

Add back the private proportion of the expense (or the full amount if drawings are charged)

For a sole trader, the owner's own wages, drawings and private costs are not deductible.

Trading allowance

£1,000 deduction from gross trading income instead of actual expenses (not in addition to them)

You claim either the £1,000 or actual expenses, never both. It only matters when gross trading income is over £1,000. Choose the allowance when actual allowable expenses are less than £1,000. Otherwise deduct actual expenses.

Gifts to customers

Allowable if cost ≤ £50 per person per year, carries a conspicuous advert, and is not food, drink, tobacco or vouchers

Gifts of the above type that fail the test are disallowed.

Main pool WDA

WDA = 18% × (TWDV b/f + additions not covered by AIA or FYA − disposal proceeds)

Reducing balance. Time-apportion for a period shorter or longer than 12 months.

Special rate pool WDA

WDA = 6% × (TWDV b/f + additions − disposal proceeds)

Covers integral features and cars with CO2 emissions over 50 g/km.

Annual investment allowance

AIA = 100% of qualifying expenditure, up to £1,000,000 a year

Not available on cars. Time-apportion the limit for short or long periods. Allocate it to the special rate pool first if the limit is short.

Company FYAs

Main pool 100% (full expensing); special rate pool 50%

Companies only. Brand new qualifying plant.

Car rates

New zero CO2: 100% FYA. Second-hand zero CO2: 18%. 1 to 50 g/km: 18%. Over 50 g/km: 6%

Cars never qualify for AIA.

Disposal value

Deduct the lower of sale proceeds and original cost

Capital profit above cost is chargeable gain territory, not a pool deduction.

Balancing adjustment on cessation

Balancing allowance = TWDV − proceeds (if positive). Balancing charge = proceeds − TWDV (if positive)

No AIA, FYA or WDA in the final period.

Structures and buildings allowance

3% straight line

Applies to qualifying construction cost, not to land or plant.

Year 1 (tax year of commencement)

Actual profits from start date to the following 5 April

Time-apportion accounting period profits to the nearest month, as the exam instructions require.

Year 2 when an accounting period of 12 months or more ends in year 2

12 months' profits to the accounting date falling in year 2

If an accounting period of 12 months or more ends in year 2, tax the 12 months to that accounting date. This also applies when the first period ended in year 1 and the next 12-month period ends in year 2.

Year 2 when no accounting period ends in the tax year

Actual profits for the tax year (6 April to 5 April)

This happens when the first period is long and ends in year 3.

Year 2 when the accounting period ending in year 2 is shorter than 12 months

First 12 months of trading

Applies when the first accounting period ends in year 2 but is under 12 months.

Year 3 onward

Current year basis: the accounting period ending in the tax year

If the accounting period is 12 months, take the whole period.

Overlap profits

Profits taxed more than once in the opening years

Relieved on cessation, or on a change of accounting date if applicable.

Overlap period

Overlap profits = overlap months × monthly profit. The overlap period is the profits from the start of trading to the first 5 April (taxed in year 1 and again in year 2), plus any further months taxed twice because the basis periods of year 2 and year 3 overlap.

Find the months taxed twice from your timeline, then multiply by the monthly profit of the period they fall in.

Final year basis period

From 6 April in the tax year of cessation to the date of cessation

A tax year's profits are those arising from 6 April to 5 April, found by time-apportioning the accounting periods. The final year therefore cannot exceed 12 months.

Final year assessment

Profits of the final basis period (after capital allowances) − unrelieved overlap profits

Overlap profits are relieved once only. In the exam, work out the profit first, then deduct overlap profits.

Capital allowances in the final period

Pool balance + additions − disposal values (each capped at cost) = balancing allowance (if positive) or balancing charge (if negative)

No WDA is given in the final period. AIA and FYA are not given on expenditure in the period of cessation, so additions just go into the pool. Use the disposal value capped at cost for each asset. Assets kept by the owner are taken at market value.

Class 4 NIC rates

6% on profits of £12,571 to £50,270; 2% above £50,270; nil up to £12,570

Class 4 NIC is based on the same assessable profits as income tax, after overlap relief.

Cap on income tax reliefs

Cap = higher of £50,000 or 25% × adjusted total income

Applies to sideways relief and opening year relief, not to carry forward or terminal loss relief. Loss not relieved because of the cap remains available to carry forward against future profits of the same trade.

Carry forward relief

Loss c/f set against the first available profits of the SAME trade, as early as possible

Must be used in full against each year's trading profit before moving on, even if this wastes the personal allowance. It is not a claim. It applies automatically against the first available profits of the same trade, so there is no claim time limit to state.

Sideways relief

Loss of year X set against total income of year X and/or year X−1 (either order)

Claim within 12 months of the 31 January filing deadline for the loss year. For each year claimed, the claim is for the full amount available, subject to the cap. You cannot restrict it to protect the personal allowance.

Opening year loss relief

Loss in tax years 1 to 4 of trading set against total income of the 3 preceding tax years, earliest first

Same time limit as sideways relief. The cap applies. Loss not used in the claim remains available to carry forward against future profits of the same trade. You can alternatively claim sideways relief for the loss year and the previous year.

Terminal loss relief

Terminal loss = loss of the last 12 months of trading = loss of the final tax year + the part of the previous tax year's loss falling in those 12 months. Set against trading profits of the final tax year, then the previous 3 tax years, latest first

Not capped. Claim within four years of the end of the tax year of cessation. This is the only trading loss relief with a four-year time limit. Any unrelieved overlap relief is deducted in the final tax year's computation, so it increases the loss.

Relief against capital gains

After an income claim for the year, unrelieved loss may be set against chargeable gains of the same year, limited to the gains left after current year capital losses and before the annual exempt amount

Available only after a claim against income has been made. The loss left unrelieved after that income claim is then set against the gains of the same year. A loss set against gains is not subject to the cap on income tax reliefs.

Order of profit allocation

Adjusted profit − salaries − interest on capital = residual profit, shared in the PSR

Salaries and interest are allocated first, even if the residual is nil or negative. A negative residual is shared in the PSR.

Partner's total share

Salary + interest on capital + share of residual

The total shares of all partners must add back to the adjusted profit (or loss) for the period.

Interest on capital

Capital × agreed rate × time fraction

Use the rate in the question and the capital each partner holds. Adjust if the period is part of a year.

Change during the period

Profit for time period = Adjusted profit × months in period ÷ months in accounting period

Use this when the PSR, salaries or partners change. Assume profit accrues evenly unless told otherwise.

Partner's tax treatment

Share of profit = partner's own trading profit

Apply the sole trader rules to each partner individually, including loss relief and Class 4 National Insurance.

Class 4 NIC: nil band

Profits £1 to £12,570 per year × 0% = nil

No Class 4 is due on profits up to this level.

Class 4 NIC: main band

(lower of profits and £50,270 − £12,570) × 6%

Maximum profit in this band is £37,700. Applies to profits £12,571 to £50,270.

Class 4 NIC: upper band

(Profits − £50,270) × 2%

Only on profits of £50,271 and above. Do not apply 2% to total profits.

Total Class 4

Main band NIC + upper band NIC

Round to the nearest £ at the end, as the exam instructions allow.

Class 2 NIC

No compulsory charge; no rate in ACCA's table

Do not invent a rate. Class 4 is the self-employed NIC you calculate.

Quick revision

• Check the badges of trade: subject matter, frequency of transactions, length of ownership, supplementary work or marketing, profit motive, how the asset was acquired, and the circumstances of the sale.
• Adjust profit by removing disallowable expenses, then non-trading income, then adding trading income that is not in the accounts.
• Capital allowances replace depreciation, so add back depreciation and deduct allowances.
• Main pool writing down allowance is 18% and the special rate pool is 6%.
• Annual investment allowance is 100% up to a £1,000,000 expenditure limit. Sole traders and partners use the AIA and writing down allowances.
• The enhanced first year allowances in the tax table (100% main pool, 50% special rate pool) are for companies only. Do not give them to a sole trader or partner, whose only 100% first year allowance is for new zero-emission cars.
• Cars: new zero-emission cars get 100% first year allowance. Second-hand zero-emission cars and cars with CO2 of 1 to 50 g/km get 18%. Cars with CO2 over 50 g/km get 6%.
• Cars are classified by CO2 emissions, so read the emissions figure in the question before choosing the rate.
• From 2024/25, profits are taxed on the tax year basis: the profit for a tax year is the profit arising in that year. Time-apportion periods of account where the accounting date is not 5 April, and write out the tax years for the opening and closing years.
• Transitional overlap profits brought forward from the old basis are deducted in 2024/25, or on earlier cessation.
• Class 4 NIC is 6% on profits from £12,571 to £50,270 and 2% above that.
• Partnership profit is allocated by the sharing arrangements in the period of account, then taxed per partner as if each were a sole trader.
• Remember that your answer needs workings shown in Section C, and round to the nearest £ as instructed.

Common mistakes

• Treating the badges as a checklist where a set number must be met. Fix: Say the badges are indicators weighed together. Conclude on the overall picture.
• Giving a conclusion without linking it to facts. Fix: For each badge, quote a fact from the scenario and say which way it points.
• Adding back allowable expenses, such as staff entertainment or repairs. Fix: Check who the entertainment is for. Staff entertainment is allowable. Repairs are allowable if they restore the asset, but improvements are capital and disallowed.
• Deducting capital allowances inside the adjustment and again later. Fix: Add back depreciation in the adjustment. Deduct capital allowances once, as the final step.
• Claiming AIA on a car. Fix: Cars never get AIA. Put them in the main pool (1 to 50 g/km) or special rate pool (over 50 g/km). Only a new zero-emission car gets a 100% FYA.
• Applying WDA in the year of cessation. Fix: In the final period, no AIA or WDA. Work out the balancing allowance or charge only.
• Taxing the first accounting period in full in the first tax year Fix: Year 1 is always the profits from the start date to the next 5 April, apportioned by months.
• Using the wrong year 2 rule Fix: Ask: does an accounting period end in year 2? If yes, is it 12 months or more? Work through these questions in order.
• Giving writing down allowance in the final period, or AIA or FYA on expenditure in the period of cessation. Fix: In the final period, stop and compute the balancing allowance or charge. Only a balancing adjustment goes in the final computation.
• Using the accounting period ending in the tax year as the basis period. Fix: Under the current rules a tax year is assessed on profits arising from 6 April to 5 April. Time-apportion the accounting periods. In the final year, the basis period is 6 April to cessation.

Exam tips

• Always name the badge and quote the fact. Marks are for application, not just listing.
• Give a clear conclusion. A balanced discussion with no decision loses marks.
• In objective test questions, look for the one badge or fact that decides the case, such as inherited, bought only to resell, or short ownership.
• State the tax consequence in one line after your conclusion. It shows you know why the question matters.
• If a computation follows, move on at once to the adjustment of profits and use the rates ACCA provides.
• In objective tests, the trap is usually the exception: staff entertainment, small logo gifts, or a private proportion. Read the wording before choosing.
• In Section C, set out your answer in three columns or lines: item, add back, deduct. The marker awards marks for each correct treatment, so show every line, even a zero.
• If a question says an item is capital, add it back and move on. Do not argue about the reasoning.