What You Need to Know About the UK Financial Year
When you’re starting out with a new business venture, you’ll need to have a working knowledge of the finances involved. For companies based in this country, this means knowing about the UK financial year and how it works. Below, we’ve provided some information on what you should know about the financial year before you get started.
What is a Financial Year?
A financial year, which might also be called a fiscal year or a budget year, is a period of time specified in government accounting. It’s often used for the purpose of setting out a country’s budget. Generally, a country’s financial year won’t run in alignment with the traditional calendar year. As such, the countries which follow this system will generally have taxation laws that require accounting records to be kept and maintained, and taxes to be calculated and assessed, in alignment with the financial year that has been set out by the government.
Calculating tax on an annual basis is especially relevant in terms of direct taxation, particularly when collecting income tax from a population. For many places, annual government fees, such as license fees and council tax, will also be levied based on the financial year. This is also why a fiscal year can also be known as a tax year.
When is the Start and End of the Financial Year in the UK?
The UK tax year starts on 6th April of one particular year, and will run until 5th April of the next year. To give an example, if the tax year starts on 6th April 2021, it won’t end until 5th April 2022.
Specific fiscal years will often be known by the numbers of the calendar year it covers. So, if you wanted to see the figures for the year given above, you would need to look for the fiscal or tax year 2021/22. The next year would then be 2022/23, and so on.
Why Does the UK Financial Year Start From April?
The reason the fiscal year in the UK starts from April dates back centuries and involves not only our own country but also a number of other countries and powers across Europe.
In 1582, Pope Gregory XIII ordered that the existing Julian Calendar, named after Julius Caesar, should be changed. This is because even though the Julian Calendar had been reasonably accurate when it was first put in place in 45 BC, the 11 and a half minutes difference between it and the solar calendar had built up over the 500 years that had passed since, resulting in a difference of 10 whole days.
This prompted the Pope to introduce the Gregorian calendar, which reduced the length of the calendar year from 365.25 days to 365.2425. This works out at a reduction of roughly 10 minutes and 48 seconds every year, and helped to ensure the new calendar system was even more accurate than the previous one. The Gregorian Calendar was then introduced to Italy, Spain, Portugal, and what was then known as the Polish-Lithuanian commonwealth.
The Gregorian Calendar wasn’t introduced in the British Empire until 1752, by which time the UK was 11 days off the rest of Europe because of the increase as time passed. It was then that it was decided the calendar should be changed.
However, there was a problem that the government still had to overcome; on the old calendar, the financial tax year had begun on 25th March (the old New Year’s Day). To prevent the loss of revenue, the Treasury decided that the financial tax year should be of the same length as it had always been (365 days), but would end on 4th April of the next year to account for the 11 missing days omitted when the UK switched from the Julian Calendar to the Gregorian Calendar.
The system worked smoothly and accurately until 1800, as this was not a leap year in the Gregorian Calendar, when it would have been in the Julian Calendar. To make up for this, the Treasury moved the start of the new tax year from 5th April to 6th April, and our tax year has started from April ever since.
Why Do We Have a Fiscal Year in the UK?
Most countries use either the calendar year for financial reporting, or they agree on their own fiscal year. When these countries choose to set their fiscal year, the dates involved will be left up to their governments. In the UK, our fiscal year is set from 6th April to 5th April of the next year because this reflects the change from the Julian Calendar to the Gregorian Calendar.
Unlike countries that set their financial tax year by the calendar (from 1st January of a particular year), this allows for a certain number of advantages, including the fact that the fiscal year method keeps tax collection at the same time for both income and expenses, making it easier for individuals to keep track of their finances.
Setting different dates for the financial tax year can also paint a more accurate picture of a company’s financial performance, as they can then set start and end dates that best align with their revenue and expenses.
How Does the UK Financial Year Affect Businesses?
For businesses, the fiscal year is to be used for carrying out financial reporting. This means laying out your yearly financial statements to determine the success of your business over the course of the year, for tax purposes, calculating capital, and more.
In the UK, the fiscal year applies to businesses operating as:
- Sole traders
The fiscal year also applies in this way to individuals working for companies, as most people hired by firms and businesses will pay their income tax through PAYE (Pay as You Earn).
Limited companies are not included in this list because they have a different financial year to sole traders and partnerships. This financial year runs from the company’s “birthday” (the day the business started trading, as specified once it’s been registered with Companies House), and will end on the day before that date on the following year.
A limited company will usually have its financial year at the same time as its accounting period for corporation tax. This is the time on which the company will need to report, and it can be shortened or lengthened a certain number of times over a period of five years.
While the fiscal year in the UK is fixed and corporation tax is charged with reference to it, a company can choose to adopt any year as their accounting year. This is a period in which a particular company or individual gathers together all records of financial activity. To keep things simple, most businesses choose to have their accounting year run at the same time as the fiscal year.
Will Your Own Company Require New Premises Soon?
If you have already established a business but you know it will soon need new premises to accommodate a growing team and all the equipment and tech to carry out day-to-day tasks, please get in touch with us. Any building from our portfolio of office spaces in London can offer you the stylish, comfortable space you need to make your company at home in the capital. We can even go through the buildings together with you, so you can choose the location which suits both your needs and your company culture best.
Our tenancies are also flexible, so if anything suddenly changes and you find yourself needing a smaller or larger space, we’ll be on hand to provide you with a new building at a different address. You’ll never find yourself worrying about the costs involved with our service, either, as our rates are fully transparent, no matter where you wish to rent.
Contact us today and we’ll do everything we can to help your business grow and reach even greater success in the new financial year.
*Reminder: At Halkin, we’re ready and fully prepared to provide clients with virtual office spaces in the time of the pandemic, offering a working solution on their ideal platform so their businesses can continue to run as they need. To find out more about what we’re doing to handle COVID-19, please get in touch with our team.