The simplest explanation is that your profit (or loss) is calculated by taking all your sales/income and subtracting it from all your expenses. This figure will either be a profit or a loss, if negative. Each tax year, the government identifies income tax bands and rates that can be found HERE. The first band is known as your ‘personal allowance’. It is the amount that can be earned without any income tax deductions, then the basic rate at 20%, higher rate at 40%, and the additional rate at 45% (correct at time of writing – 2019).
So if you have made a profit, the amount for your personal allowance is taken off and the remainder will be taxed at the appropriate rate(s). You should be aware that if you earn above £100k your personal allowance drops by £1 for every £2 you earn above, so that by £125k you will not actually have a personal allowance.
It is important to remember that the tax year runs from 6th April 20xx & ends on 5th April 20xy.
It is also important to remember that if your income during any 12 month period (not just within the tax year), exceeds the VAT threshold, you will need to register your business for VAT within one month of exceeding the threshold.
If you need any help or advice about your self assessment income tax, call us on 020 8761 8000 and arrange a 20 minute free consultation.