Learn the lingo: key Self Assessment terms explained
Happy New Year! January is finally here and if you haven’t filed your 2014/15 Self Assessment tax return yet, you’re probably planning on dusting down your business books and tackling your tax return ahead of the 31st January filing deadline.
Preparing a tax return can be daunting for many self-employed people, not least because of the accounting lingo you’re required to understand as you complete the forms. So before you begin, here’s an explanation of some of the key terms you’ll come across.
The tax year in the UK runs from 6th April one year to 5th April the following year. The tax year that the 2014/15 Self Assessment relates to ran from 6th April 2014 to 5th April 2015.
An accounting year is the year covered by your business's accounts. Unlike the tax year, which is the same for everyone, a business’s accounting year is set by the business owner and can cover a year-long period between any two dates.
Many business owners choose to have accounting year dates that match the dates of the tax year. They will record all their business’s income and expenditure for the tax year in question on each Self Assessment tax return (e.g. all their income and expenditure from 6th April 2014 to 5th April 2015 for the 2014/15 tax return).
Business owners who choose to have accounting year dates that don’t match the tax year need to record their business’s income and expenditure for the accounting year that ends in the tax year covered by the tax return. A business owner whose business’s accounting year runs from 1st January to 31st December each year, for example, would need to include their income and expenditure from 1st January 2014 to 31st December 2014 on their 2014/15 tax return.
Sole traders and partners need to record their accounting year dates on their Self Assessment tax return, but limited company directors do not.
Your profit is the amount that your business has left over once its day-to-day running costs have been subtracted from its income. In your business’s accounts, this information is illustrated in your profit and loss report.
If you’re self-employed, you need to pay tax on your "taxable profit" as part of your Income Tax liability. Taxable profit is an adjusted profit figure that's calculated through your tax return each year.
Income Tax is tax that's payable on an individual's income, which includes their taxable profit. Every individual can receive a certain amount of income tax-free each year; this is the Personal Allowance. You pay Income Tax on any income you receive in a tax year over and above your Personal Allowance.
The Self Assessment tax return adds up all your taxable income and all the tax you’ve paid so far. The figure it generates is the amount of Income Tax you have to pay by 31st January. You may also have to make a payment on account on 31st July.
National Insurance is a tax in all but name! It’s money that you pay to the government, which entitles you to receive certain state benefits, such as the State Pension. You pay National Insurance on certain kinds of income, such as salary from a job or earnings from a business, once this income goes above a certain level each year. National Insurance isn’t due on all kinds of income; you don’t pay it on dividends, for example.
National Insurance is divided into different classes, depending on what kind of income you’re earning:
- If you’re self-employed, you pay a flat weekly rate of National Insurance, called Class 2. At the moment, Class 2 National Insurance payments are usually paid twice a year via Direct Debit. For the 2014/15 tax year, you won’t need to include these payments on your Self Assessment tax return. However, from the 2015/16 tax year onwards, you will need to include your Class 2 National Insurance liability on your Self Assessment form and pay it through your tax return by the 31st January each year.
- If you’re self-employed you also need to pay Class 4 National Insurance on your business’s profits. Class 4 National Insurance is both calculated and paid through your tax return.
- If you earn a salary, you will need to pay Class 1 National Insurance. Your employer will automatically deduct Class 1 National insurance from your wages before you are paid, and will pass this amount on to HMRC. You don’t have to put Class 1 National Insurance on your tax return because it's already been deducted from your wages and paid to HMRC by your employer.
A capital asset is an asset that will be useful to your business over a long period of time (usually more than two years) and costs more than your usual day-to-day running costs. If your business purchases capital assets during the course of the accounting year, you will need to declare them on your Self Assessment tax return.
Capital allowances are a means of saving tax when your business buys a capital asset. If you claim capital allowances during the course of the accounting year, you will need to declare it on your Self Assessment tax return.
Taking the next step - help is on hand!
Now you’re familiar with some of the key Self Assessment terms, why not download our step-by-step guide for preparing and filing your 2014/15 tax return? It talks you through each stage of the process and provides lots of additional hints and tips to help you complete each section of the Self Assessment form.
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