Confusing Self Assessment tax return terminology explained

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.

Tax year

The tax year is the period of time covered by a Self Assessment tax return. Each return covers one tax year and includes income for that tax year, such as wages and bank interest.

The tax year in the UK runs from 6th April one year to 5th April the following year. For example, the tax year that the 2021/22 Self Assessment relates to ran from 6th April 2021 to 5th April 2022.

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 sole traders 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 2021 to 5th April 2022 for the 2021/22 tax return).

Sole traders 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 2021 to 31st December 2021 on their 2021/22 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, because the company's profits for the year are reported on the company's tax return, not the director's.

Taxable profit

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.

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Income Tax

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 towards the next year’s tax bill on the same date, followed by a second payment on 31st July.

National Insurance

National Insurance is money you pay to the government that 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 and your profits are high enough, you pay a flat weekly rate of National Insurance, called Class 2. You need to include your Class 2 National Insurance liability on your Self Assessment form and pay it through your tax return by 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'll need to pay Class 1 National Insurance. Your employer will automatically deduct Class 1 National insurance from your wages before you're 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.

Capital assets

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 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.

Disclaimer: The content included in this guide is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this guide. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.