Sage’s research shows small business owners are mystified by the jargon used by HMRC. 

For example, 42 per cent said they wouldn’t be able to explain the Government’s Making Tax Digital initiative, almost one in five would struggle to define PAYE, and more than a fifth didn’t know the difference between the minimum wage and the living wage.

But with some planning and John’s top tips, tax return season doesn’t have to be terrifying.

He breaks down some of the jargon used in the tax world, to make it easier to understand and give you a handle on your taxes ahead of the deadline next month.

VAT – Value added tax

VAT is a tax added to most products and services sold by VAT-registered businesses.

It is literally a tax on value. But the rates and things it applies to vary, so your lunchtime meal deal has no VAT, but your tank of petrol does (20 per cent).

Your train ticket has no VAT, but the gas you use to heat your home does (5 per cent). Believe it or not, the pasty you buy from your local deli has been through five tests to see if it meets the criteria for VAT, so that’ll vary depending on how it’s cooked, stored, advertised and served.

You don’t need to know the intimate history of every pasty you buy, but the receipt must tell you how much VAT has been charged.

Once that info is in your accounting software, it’ll help you do the rest.

PAYE – Pay as you earn

This is the bit of your monthly payslip that puts a grimace on your face.

Six months into being self-employed, I would yearn for those calculations to be made by some accounting whizz.

PAYE is basically an automatic deduction made from your wages before they get to you. It stands for ‘pay as you earn’, and means the money you earn that is owed for income tax, National Insurance, and student loan repayments.

In other words, the money that doesn’t make it into your pocket before it’s passed on.

And while this may seem annoying, it saves you doing a tax return every year and, crucially, protects you from the awful realisation you’ve spent all that money when the bill comes – a lesson hard learned in my case.

People who don’t have tax deducted through PAYE tend to be self-employed and are responsible for calculating what they owe themselves.

But this doesn’t have to be stressful with the help of good software and a trusted accountant by your side.

Gross and net income

Let’s say you’re making some delicious jam tarts for your family because, if you’re being honest, they’re easy and you’ve run out of ideas. But not every grain of flour and bit of raspberry will end up on their dessert plates.

When you came back from the supermarket with all the shopping, you had the gross ingredients. But when you made the jam tarts, some flour might have spilled out of the bowl.

You didn’t use all the jam. And there was some leftover dough. What comes out of the oven is the net profit of those gross ingredients.

It’s the same with your earnings and income.

Your business might have lots of income streams, invoices paid, products sold, interest, capital gains, even tips. These are the ingredients. When you add all these up, it’s your gross income, or turnover.

But if you were taxed just on that, it wouldn’t be fair, because providing those products and services costs you money. Things like petrol, packaging, utilities, and the subscription to your accounting software.

Working out what costs can and can’t be claimed back is something an accountant can help you with. The figure left over when you’ve removed all the costs from your gross income is your net income, and that’s the figure you pay tax on.

***
Read more at DailyMail.co.uk