Filing your Self Assessment tax return can seem like a lot to take in, especially with all the tax lingo floating around. This glossary will help you make sense of the most important terms you'll come across.
Being your own boss can be brilliant, but filling in your annual Self Assessment… not so much. Never fear – we’ll break down some of the terms you might encounter, and what they mean in a practical context.
Read more: Your essential guide to Self Assessment
Sole traders pay tax on a year’s worth of profits at a time, and this is the information you’re providing to HMRC when you submit your annual Self Assessment Tax Return. As a business owner, you’re free to select any date to be your accounting period year-end, but it’s usually simpler to align it with the tax year, which runs from 6th April – 5th April.
These are expenses that HMRC allows you to deduct from your overall profit before calculating your tax liability. Only necessary business expenses qualify, for example, office costs, travel expenses, business insurance, etc.
Read more: A basic guide to expenses for the self-employed
A balance sheet is a financial statement summarising a business’s assets (what it owns) and liabilities (what it owes) at a given point in time. Accounting software often generates this automatically, usually at the end of the financial year. For example, if your business owns £50,000 worth of equipment and has outstanding loans of £10,000, your balance sheet would show a net asset value of £40,000.
When purchasing capital assets for business use, like machinery, vehicles, or office equipment - you can claim capital allowances to reduce taxable profit. For example, if you buy a van for £20,000 to use in your business, you may be able to deduct the cost from your taxable profit, lowering your tax bill.
If you sell an asset (such as property, shares, or valuable items) for more than you paid, you may need to report this gain in your Self Assessment tax return and pay Capital Gains Tax on the profit generated.
Your gross profit is your total business income (turnover) minus the direct costs of producing or providing your goods/services.
Income refers to money received by your business from customers for goods and services. Your personal taxable income is what remains after deducting allowable expenses and allowances. For example, a freelance graphic designer earns £40,000 from clients. After deducting £5,000 in business expenses, their taxable income is £35,000.
If you fail to submit your Self Assessment tax return by the deadline (usually January 31st for online submissions), you’ll face a penalties. The penalty for late filing is £100 if your tax return is up to three months late, with the amount increasing if it’s later.
This allows one spouse to transfer £1,260 of their Personal Allowance to the other, reducing their tax bill by up to £252 per year. For example, if one spouse earns £12,000 (below the tax threshold) and the other earns £35,000, they can transfer part of their allowance to reduce the higher earner’s tax liability.
Net profit is your gross profit minus indirect costs and expenses. So, if your gross profit is £70,000 and you have £20,000 in rent, insurance, and utilities, your net profit is £50,000.
A unique identifier ensuring National Insurance Contributions (NICs) are correctly recorded for benefits and pensions.
A business owned by two or more self-employed individuals, where partners share profits, losses, and responsibilities.
The amount of income you can earn before paying tax. The standard Personal Allowance is £12,570 (as of the 2024/25 tax year).
The Self Assessment tax return form used by individuals to report income, tax, and allowable expenses.
A method to calculate certain expenses using flat rates instead of actual costs. For example, if you work from home, you can pay a flat rate based on the number of hours you spent working rather than a proportion of your utilities.
Learn more: What expenses can you claim if you run a business from home?
Tax relief reduces the amount of tax you pay to the government. You get some types of tax relief automatically, but must apply for others. It enables the deduction of certain payments made during the tax year from gross income to cover money you’ve spent on business expenses or costs, or to get back tax or have it repaid in another way (e.g., into a personal pension).
This refers to the 12-month trading period covered by your Self Assessment tax return. The UK tax year runs from April 6th to April 5th of the following year.
The first £1,000 of income earned through self-employment isn’t subject to tax and is referred to as your ‘trading allowance’. That means you don’t have to submit a Self Assessment tax return for any income you make under this amount.
A 10-digit number assigned by HMRC to identify self-employed individuals and businesses for tax purposes. This must be used on Self Assessment tax returns.
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