Basic Principles of Tax and Business

When thinking about tax and accounting, the terminology can be confusing – not everyone is familiar with  basics like “turnover” and “profit” – so here are some basic concepts to understand and refer back to.

Definitions

First, some definitions:

• Turnover – sometimes called “takings”, “sales”, “business receipts”, “gross income” or “business income” – this is the total amount of your self employed income from clients, students and classes
• Expenses – also called “costs” “outgoings” – this is the total of items you’ve spent running your business, ie the costs of earning your turnover
• Profit – also called “net income” – Turnover less expenses
• Accounts – a summary of your turnover, expenses and profit used to report your business performance for tax and management purposes (also called Financial Statements).  Typically comprises a Profit and Loss Account, and maybe a Balance Sheet.  These will be drawn up for your Financial Year which is normally the tax year, but you could choose a calendar year or the anniversary of your starting in business
• Bookkeeping – the keeping of records of turnover and expenses for accounting purposes

Example

• Mary is a self employed yoga teacher.  She teaches 100 classes a year, each earning £50.  Each class has a room hire fee of £10.  Twice a year she pays a cover teacher £25.  Her annual insurance is £100
• Mary’s Turnover is £5,000
• Mary’s Expenses are 100 x £10 = £1,000 plus 2 x £25 = £50 plus £100.  Total £1,150
• Mary’s Profit is £3,850

Why is this important?

• Establishing the Turnover and Profit is important for tax purposes.
• Income Tax under Self Assessment is always based on Profit.  Corporation Tax for Companies is based on Profit.  Therefore simply, the higher your expenses, the less tax you pay
• VAT (Value Added Tax) is based on Turnover, both for registration requirements and for calculating your vat.  VAT on some expenses is deductible, but only to reduce the VAT bill, not the registration threshold
• This terminology is used by HMRC (HM Revenue and Customs) in the UK, other tax authorities worldwide, banks, accountants and advisers, and in the business world.

For more detail see our guides on

• How is a Yoga Teacher Taxed,
• Tax Examples,
• What Expenses Can Be Claimed Against Tax
• Working Through a Limited Company

Business Structure Basics

Its important to know the Structure of Your Business – whether you are a Sole Trader, Partnership or Company – as this effects your registration obligations, how you are taxed and other regulatory obligations.  A business cannot operate in a legal vacuum, it has to be something.  Sole Trader is the default.

See our guide to Choice of Structure – Sole Trader, Partnership or Company?

Tax Basics

A few basics to be aware of:

• A Sole Trader is taxed as an individual.  Profits are added to other income, eg from a job, or from rents, and the total is subject to Income Tax via Self Assessment.  This will be most, but not all, Yoga Teachers.
• A Partnership – including LLP –  is taxed as if it is a collection of Sole Traders – each Partner is subject to Income Tax via Self Assessment on their profit share.
• A Limited Company pays Corporation Tax on its profits.  It pays a salary/wage to its Directors, and dividends to its Shareholders – these could be one and the same or different persons.  Provisions exist to avoid double taxation, thats to say Income tax and Corporation Tax are not charged on the same amounts.
• Directors of a Limited Company report their salary on their Self Assessment along side any other personal income
• Shareholders of a Limited Company report their dividends on their Self Assessment along side any other personal income.  Dividends are taxed at a special rate of Income Tax called “Dividend Tax”
• All businesses – Sole Traders, Partnerships and Limited Companies – may be subject to VAT if their turnover exceeds the registration threshold, currently (2023/24) £85,000
• In the UK all taxes are administered by HM Revenue and Customs (“HMRC”)

Accounts Basics

Alas the terms get confused, but Accounts and Tax Return are separate.  Here are some definitions:

• Bookkeeping – also called “records”, sometimes just “books”, confusingly sometimes “accounts” (which they aren’t!)  – this is the record you keep of income and expenses.  This could be on paper in an accounts book or diary; using a spreadsheet; or using a programme or app.  From 2026 under Making Tax Digital many small businesses need to keep Digital Records in some form.
• Accounts – sometimes called Annual Accounts, Audited Accounts or Financial Statements – these are an annual summary of your Income and Expenses.  At a minimum they will contain a Profit and Loss account (maybe called a Income Statement), sometimes also a Balance Sheet.  They are often prepared by an accountant for you.  To note, although they are sometimes called “Audited Accounts” colloquially, only very large business (at the time of writing those with turnovers over £10m) are obliged to have their accounts audited.
• Tax Return – also called Self Assessment – this is the return to HMRC of your taxable income, which normally comes from your accounts.  For individuals this tax return is called a Self Assessment.  Sometimes, for simple returns, the return may be prepared from the bookkeeping without annual accounts, however if you engage YogaTax, or another accountant, the accounts will be part of the work carried out to prepared your return in any event.