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ACCA Applied Skills · Taxation (UK)

Income from Self-Employment for ACCA TX-UK

Income from self-employment is the taxable trading profit of a sole trader or partner. You start with accounting profit, adjust it for tax, deduct capital allowances, then assign the result to a tax year using basis period rules. Losses, partnership shares and Class 4 NIC complete the picture.

What this chapter covers

This chapter covers how the profits of a sole trader or partner are taxed. You begin by deciding whether an activity is a trade at all. Then you turn the accounts profit into a tax-adjusted profit, deduct capital allowances, and decide which tax year the profit belongs to.

The later topics deal with special situations. Profits are taxed on a tax year basis, with special rules for opening and closing years. Losses can be relieved in several ways. Partnerships need a profit split between partners. Finally, Class 4 national insurance is charged on the profit, and Class 2 is covered only to the extent your study materials and the exam require.

This chapter feeds the rest of the paper. The trading profit goes into the income tax computation, where you apply the rates and bands from the tax tables. Capital allowances link to the corporation tax chapters, losses link to later loss relief topics, and NIC links to the employment chapter. A confident grasp here helps you in Section A objective test questions, Section B OT cases and the constructed response questions in Section C.

Self-employment income is one of the most examinable areas of TX-UK because it appears in Section A objective test questions, Section B OT cases and the longer Section C questions on income tax. Adjustment of profit and capital allowances are calculation-heavy, and these are marks you can win through practice. Because OT questions are marked all or nothing, accurate working matters. Basis periods and losses are also tested through short scenario questions. Learning this chapter well gives you a base for the whole income tax section.

Income from self-employment: topics in the order to study them

  1. 1Badges of Trade and Trading IncomeYou need to know when an activity is a trade before any profit calculation makes sense.
  2. 2Adjustment of Profits for Tax PurposesThis is the core calculation: start from accounting profit and remove disallowable items and non-trading income.
  3. 3Capital Allowances: AIA, WDA and FYAAllowances replace depreciation, so you learn them straight after the adjustment of profits.
  4. 4Basis of Assessment and Opening Years RulesOnce you have a profit figure, you learn which tax year it is taxed in. Profits are taxed on the tax year basis, so you apportion profits to tax years, starting with the first year of a business.
  5. 5Closing Year Rules and Cessation of TradeThis builds on the opening years rules and finishes the life cycle of a business. It also covers how transitional overlap profits carried forward from the old basis are deducted in 2024/25 or on earlier cessation.
  6. 6Trading Losses for Sole TradersLoss reliefs depend on the tax year in which the loss arises, so they come after the basis of assessment topics.
  7. 7Partnerships and Profit SharingPartnerships reuse the adjusted profit, capital allowances and tax year basis, then split the result between partners.
  8. 8Class 4 and Class 2 National Insurance ContributionsNIC is charged on the final profit figure, so it is the last step. Class 4 rates are in the tax tables.

How to prepare Income from self-employment

Treat this chapter as a sequence. Each topic uses the answer from the one before, so build the skill in order and then practise full questions.

  1. Learn the badges of trade as a short checklist and apply each one to a mini scenario.
  2. Practise adjustment of profit using a standard layout. Work through accounts line by line and mark each item as allowable, disallowable or non-trading.
  3. Drill capital allowances with a pool layout. Use the rates and the annual investment allowance limit from the tax tables, and practise cars by emissions band.
  4. Draw a timeline for opening and closing years. Write down each tax year (6 April to 5 April) and the profits of the periods of account you will time-apportion into it before you calculate anything.
  5. Work loss relief questions by listing the options and comparing which reliefs the question allows.
  6. Practise a partnership question: allocate the profit, then compute each partner's share for the tax year.
  7. Finish with Class 4 NIC using the tax table rates, then attempt a full Section C style question under timed conditions.

Common mistakes in Income from self-employment

  • Deducting depreciation or amortisation as an allowable expense.

    Fix: Always add back depreciation and loss or profit on disposal, then compute capital allowances separately.

  • Using the wrong basis period in the opening or closing years.

    Fix: Write a timeline of tax years and accounting periods first. Mark which profits fall in each tax year and apportion by months before doing any arithmetic.

  • Applying the wrong allowance rate or pool.

    Fix: Check the asset, then use the CO2 band and rates from the tax tables. The 100% and 50% enhanced first year allowances are for companies only. A sole trader or partner uses the AIA and writing down allowances, plus 100% only for new zero-emission cars.

  • Forgetting to adjust allowances for a short or long period of account.

    Fix: Check the length of each period of account. If it is not 12 months, scale the writing down allowance and the annual investment allowance limit by the number of months ÷ 12. Do not scale first year allowances, such as the 100% allowance on a new zero-emission car.

  • Mixing up partnership profit allocation with the tax year assessment.

    Fix: First compute the adjusted profit for each period of account, allocate it according to the sharing ratios in that period, then apply the tax year basis to each partner.

  • Applying the wrong NIC band to profit.

    Fix: Use the Class 4 rates in the tax table: nil to £12,570, 6% to £50,270, then 2% above.

Last-day revision: Income from self-employment

  • 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.

Income from self-employment practice questions

Income from self-employment in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Income from self-employment: frequently asked questions

How do I decide if an activity is a trade?

Apply the badges of trade to the facts. No single badge decides the matter, so weigh them together and give a reasoned conclusion. In an objective test, look for the one or two facts the question highlights.

Do I need to memorise the capital allowance rates?

The rates and the annual investment allowance limit are given in the tax tables provided in the exam. You still need to know which rate applies to which asset, so practise choosing the right pool.

Why are opening and closing year rules so important?

They decide which profits are taxed in which tax year. Profits are taxed on the tax year basis, so you must apportion the profits of each period of account to the right tax year. Overlap profits only matter where they are carried forward from the old basis. Many errors come from using the wrong profits for a year, so always draw a timeline before calculating.

Are Class 2 NICs still examined?

Follow the ACCA syllabus and the current Finance Act 2025 materials for the exact treatment. The tax tables give Class 4 rates, so focus your calculations on those and check your study text for how Class 2 is dealt with.