What Is The Meaning Of Profit From Self Employment?
By
HuutiMoney
If you are self-employed and looking for the meaning of profit gained from income from self-employment, you will find guidance through the following blog post. In addition to this, we will also explain how and when tax is applied to profits from self-employment and how you can file your tax returns on such profits in time.
What Is The Meaning Of Profit From Self Employment?
The meaning of profit from self-employment is the gain made through the selling of goods or services after the deduction of the expenses incurred during the business operation. It can be calculated as follows:
Operating Income – Operating Expenses = Profit
If you are a self-employed trader who is selling goods either to businesses or directly to customers, you will multiply your per-unit sales price by the number of units sold to calculate your operating income. In the case of different types of goods being sold at different prices, each item’s sales revenue will be calculated separately and then added to calculate the operating income.
At the same time, you will need to add together all of the expenses incurred during the business operations. These are called operating expenses or overheads and include all fixed and variable costs from rent to salaries to advertising expenses.
Once you have the total operating income and operating expenses, you will deduct the expense from the income to calculate your profit. For any business to be profitable, the operating expenses need to be less than the operating income. In the other case, the business will be going into a loss rather than making a profit.
If you are a self-employed service provider such as a consultant or a freelancer, you can add your income from different sources (this includes bonus and commission as well) to calculate your operating income. Then, you will deduct the sum of your operating expenses that you may have incurred such as utility bills or resources to calculate your profit.
Do You Have To Pay Tax On Profit From Self-Employment?
Yes, you have to pay tax on your profit from self-employment if your profit is more than £1,000. You should maintain a record of your income and expenses (ideally in a formal accounting journal) even if you are self-employed and maintain any relevant receipts that can serve as proof of income and expense so that there are no errors in your accounting records when you file a tax return.
Tax on profit is calculated based on the 12-month accounting cycle that runs from April 6 of the basis year to April 5. Therefore, if you are calculating your taxable profits for the 2022/2023 tax term, you will need to take into account income and expenses dated between April 6, 2022, to April 5 2023.
To pay your tax on profit from self-employment, you will need to register yourself for self-assessment by October 5th in the second year of your business if you are self-employed. Once you register yourself, you will be issued a Government Gateway ID which you can use to set up your personal tax account to file your tax returns.
How Do You Pay Tax On Profit From Self-Employment?
You can file your tax returns on profit from self-employment through the self-assessment scheme. For this, you need to follow the below-listed steps:
- register yourself for self-assessment
- file your tax returns
- pay your taxes
If you have already registered yourself for a personal tax account, you can either file your self-assessment tax online or by using a paper form.
If you choose to file your tax return online, you can simply fill in the details that apply to you when you access your personal tax account. If you are filing your tax returns on paper, you will need to fill in form SA100 And form SA103S.
Once your tax returns are filed and submitted, the HMRC will send you a confirmation message and a reference number. As soon as the HMRC calculates the amount of tax you owe, as well as the National Insurance contributions you need to pay.
Conclusion:
The above discussion makes it clear that profit from self-employment means the remainder left after deducting your operating expenses from income earned through self-employment. This is the taxable amount of your profit that you will need to use to file your tax returns.
References:
How to report your earnings from self-employment – GOV.UK