Income & expenses

Before your tax bill can be calculated you need to work out how much you’ve earned. So it’s time to look at what makes up your business income and what expenses you can take off to arrive at your business profit.

Income tax and NI are annual taxes. They are charged on what you have earned in each tax year. In principle you can prepare your accounts and work out your profit up to any convenient date each year but it’s usually easier, and a lot less confusing if your accounts year coincides with the tax year. Unfortunately the tax year ends on 5 April, which is plainly silly so HMRC are quite happy for you to do your accounts up to 31 March each year and pretend it’s the end of the tax year.

Put simply, your profit each year is your business income less your allowable business expenses. Or, more obtusely, your profit must be calculated so as to give a true and fair view in line with UK GAAP (UK Generally Accepted Accounting Practice) and the FRSSE (pronounced frizzy, and standing for the Financial Reporting Standard for Small Entities) unless they conflict with tax legislation.

If you want to know why the tax year starts on 6 April there’s a future article coming that will make everything crystal clear. And if you want to know all about UK GAAP and the FRSSE you need medication.