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Using Self-Employment Losses Against Class 4 National Insurance. If you are self-employed and your business makes a loss, then you should make a note and use this to your advantage in future years. Here’s How.

Using Self-Employment Losses Against Class 4 National Insurance

If you are self-employed and your business makes a loss then you can use this loss against your income tax and national insurance. That way you’ll be able to save yourself some money.

How National Insurance Works When You’re Self-Employed

When you are self-employed you pay two types of national insurance – Class 2 and Class 4.

Class 2 is paid at a set amount once your profits reach a certain level. So if you have made a loss you won’t need to pay Class 2, unless you choose to do so voluntarily.

Class 4 however is paid above a certain amount of profit, based on the profits your business has made.

The current Class 4 National Insurance rates are:

 2019/20202018/2019
Small profits threshold – no NICs below this threshold£8,632£8,424
Class 4 National Insurance 9%£50,000£46,350
Class 4 National Insurance 2%over £50,000over £46,350

Using Self-Employment Losses Against Class 4 National Insurance

When you are self-employed and you make a loss, you can carry forward this loss to use against future profits.

Example:

You make a profit from your self-employment business as follows:

 2015/20162016/20172017/2018
Profit/(Loss)(£25,000)£15,000£35,000

Here’s how you can use up his trading loss made in 2015/2016 against 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 NI0
  
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/fwd0

This means you benefit from a reduction in his Class 4 National Insurance in the two tax years following the tax year you made the loss.

Make sure you keep a record of all your tax losses separately to your tax return and how you use them.

Self-Employment Losses and Income Tax

Similar to the above for Class 4 National Insurance, you can also use your loss against your income tax bill.

There is more flexibility about how you use this and in some cases you can:

  • Use your losses against future profits;
  • Carry your loss back to recalculate your tax bills in previous years;
  • Use your losses against your employment earnings if you’re employed and self-employed;
  • Set your loss off against any capital gains.

Read More About Self-Employment Losses and Income Tax

Updated 27 May 2019