Income, expenses and profit explained

To get your tax bill right, you need to know what your profit is. Your profit is the difference between your business income and your business expenses.

Business income: The amount received from your customers for the goods or services that you have sold to them. It also includes any amount received for expenses or materials you invoiced to your customers, for example, a plumber who has purchased a boiler for a customer.

Business expenses: The amount you have to spend in order to run your business including the amounts spent on expenses and materials invoiced to customers.

Profit: Your profit is your business income minus your business expenses. It is your profit on which you are taxed.

For example:

If your profit is £7,000 and your expenses are £1,000, then your profit would be £6,000.

Exchanging or bartering

If you exchange or barter, that is you work for someone or give them goods in exchange for them giving you goods or services, you must include this in your business records. This would be recorded as income and under some circumstances also as an expense in your business records.

For example:

James paints Andy’s house in exchange for Andy giving James a lawnmower. James must include in his sales the value of the painting work, which would usually be listed as the market value of the lawnmower so long as the deal was commercial. His business expenses would only include the cost of the lawnmower if he used it exclusively for business.

Working out your profits

When you have all the information about your income and expenses you can prepare your business accounts and work out your profits.

If you have an accountant, your accountant will prepare this and will make the necessary adjustments to comply with any tax rules.

If you do not have an accountant, you will need to submit this information yourself and put these figures into your self-assessment tax return.

If you file yourself-assessment tax return online, then your profit will be calculated automatically, and you will see an estimate for your tax liability for the year in question. This will be accurate as long as the information you put in is correct from your business accounts, and the correct sections have been filled out.

If you use a paper-based tax return, then you must calculate your own profit.

It is advisable that you save money from your income to pay your taxes when they are due.

Private and business finances

Many small business owners or sole traders will use their private bank accounts to manage their personal and business finances. We understand that the boundary line between business and private expenditure can be difficult to find at times, so we urge that you work to keep your personal and business expenses separate. If possible, have a separate business bank account and use it only for business expenses. If you have expenses that are partly for business and partly for private, keep a clear record of this.