Online Tax Glossary – Tax Terms Explained

The online tax glossary is here to help you understand terms which may be unfamiliar, and to get tax terms explained in a plain and simple way.

We’ve been asked many questions over the years, which has helped us put together many of the most popular terms related to the subject of tax.

The tax glossary is aimed at helping the normal working person get a better understanding and explanation of what tax is, and how it affects them.

A

Abroad (sometimes referred to as Overseas): Any country that is outside of the United Kingdom (England, Scotland, Wales and Northern Ireland).

Accountant: A professionally qualified individual who prepares accounts for a business. An accountant can also prepare a tax return for you

Accounting and Audit Fees: This is the fee payable to an accountant for preparing business accounts; they are allowable as expenses – this means they may be deducted from your taxable profit

Accounting Date: The final day in the accounting period – usually the end of the financial year. The date could be changed but there are rules and it is advisable in this case to speak to an accountant

Accounting Period: This is the inclusive twelve month period on which a business’ accounts are based. Rules concerning the accounting periods of the first and final years of a business can be complex.

Accruals: Earnings included in a business’ accounts where payment is yet to be received.

Accruals Basis of Accounting: This takes into account income and expenses incurred during an accounting period but not yet received or paid.

Acquisition: In Capital Gains Tax rules, this means obtaining an item (purchasing or any other means)

Additional Rate Tax: If an individual’s income exceeds £150,000, the individual will be liable to pay tax at the high rate of 50% for everything over and above that threshold

Age related allowances: Certain additional tax-free allowances apply to those aged 65 and over in the tax year. Allowances may be restricted when total taxable income exceeds limits set for the given tax year. If income exceeds £100,000 then further reductions on the personal allowance will be applicable: £1 for every £2 of income over £100,000

Allowances: Allowances are the standard tax-free limits set by the government – it is reviewed every year. The allowance is given to all UK & Commonwealth citizens and some others who may qualify. The Personal Allowance is given to everyone resident in the United Kingdom. From 6th April 2010 the allowance has been subject to an income limit of £100,000. An individual whose income exceeds that will have the allowance withdrawn at £1 for every £2 of income over £100,000.

The Married Couples Allowance has been restricted to those over 65 at 6th April 2000.

Anti-avoidance: Anti-avoidance rules are now part of tax legislation to close all loopholes which have in the past been used to avoid paying tax.

Annual Investment Allowance: The Annual Investment Allowance (AIA) can be used against new equipment (except cars) during a tax year and up to £50,000. If the total cost of all equipment is £50,000 or under, you can claim all of it as your AIA.

Appeals: Appeals procedures are set down by law; disagreements between a taxpayer and the HMRC is be settled by an independent tribunal. There is a right of appeal against HMRC decisions but the appeal must be made within 30 days of the assessment or amendment. Late appeals are possible and the grounds for the appeal must always be stated. If no agreement is reached at the Upper Tribunal, the appeal will be referred to the General Commissioners and some may be heard by Special Commissioners. Later, it can go to the Court of Appeal and then the Supreme Court

Approved Mileage Allowance Payments: An employer will not need to pay tax when reimbursing transport costs for business trips: 40p per mile for the first 10,000 business miles and 25p per mile thereafter. The following standard mileage rates apply:

Up to 5th April 2011

First 10,000 miles in the tax year – 40p per mile

Each additional mile thereafter – 25p per mile

From 6th April 2011

First 10,000 miles in the tax year – 45p per mile

Each additional mile thereafter – 25p per mile

At source: This is when tax is deducted from income before it has been paid to the beneficiary. The most common schemes are: PAYE, Construction Industry Scheme (CIS4-CIS25), Non-resident landlord Scheme (NRL6) and Tax on Interest

B

Bad Debts: This is money owed that has not been paid to a business after a reasonable period of time

Balancing Allowances: A business’ assets will depreciate in value over time; the cost of this depreciation can be claimed as an expense – it is known as a “capital allowance”. The amount claimed should cover the depreciation over the life of the asset. When the asset is sold, actual depreciation may be more than the already claimed capital allowances. If this is the case, you should be able to claim a balancing allowance equal to the actual depreciation, less capital allowances already claimed.

Balancing Charges: A business’ assets will depreciate in value over time; the cost of this depreciation can be claimed as an expense – it is known as a “capital allowance”. The amount claimed should cover the depreciation over the life of the asset. When the asset is sold, actual depreciation may be less than the already claimed capital allowances meaning that excessive expenses have been claimed. A balancing charge will appear in the accounts equal to capital allowances already given and less the actual depreciation of the asset

Bare Trust: When an asset is held in Trust by someone who is not the owner the actual owner is still liable for any tax on the income.

Base Rate: The Bank of England sets this standard rate of interest on a monthly basis. It forms the basis of the official interest rate for a given tax year and is used to calculate taxable benefit on low interest loans from an employer

Basic Rate Tax: The standard payable percentage of tax is 20% (meaning you pay 20p in every £1). The basic rate limit for the current tax year is £34,370. Higher and additional rates of tax at 40% & 50% apply above this rate

Basis of Accounting – Accruals: A method that accounts for income and expenses during an accounting period, even though they are pending.

Basis of Accounting – Cash: A method where the income actually received is accounted for. Income from work done before the cut-off date but received afterwards would be considered in the next set of accounts (this may not be used for any set of accounts beginning on or after 6 April 1999)

Basis Period: The period for which the profits are taxable; this is typically the same period as the actual accounting period because tax is paid on the profit shown on the accounts.

Special rules apply in:

  • The first three years of a business
  • When the business comes to an end
  • If the accounting date changes

These rules mean that the profit against which you are taxed will not always be calculated from a single set of accounts; the basis period might be different than the accounting period in some cases

Beneficial Loans: This is a loan granted to employees at a low rate of interest; there may be taxable benefits from offering such a loan. Not all are taxable and there will be no charge if the total of all loans that do not qualify for tax relief elsewhere is below £5000.

Where chargeable, tax will be due at a standard rate on the difference between interest paid and interest payable. If a loan qualifies for tax relief against the interest paid, then relief may be due on the taxable element – see Deemed Interest for further information

Beneficiary: In general terms, a person who benefits; the term is most commonly used for someone who draws an income from a Trust or Estate of a deceased person

Benefits (employment): When you receive something other than a salary from your employer they are considered taxable benefits. These could include: a company car, medical insurance and accommodation. Your employer should provide a P11d form at the end of every tax year for you to fill out and declare the taxable benefit of that year. The information is sent to H M Revenue & Customs and must be included on your self-assessment

Blind Person’s Allowance: This is permitted if you are registered blind with a local authority. In Scotland and Northern Ireland this is not possible and you simply inform your tax office.

Bonus Issue: Where extra shares are given to existing shareholder but not extra costs are incurred

Books: If the costs of books is a necessary expense for the job (and are solely for the business), they can be claimed against taxable income. Employees must also prove that the job could not be carried out without purchase of said books; this can be difficult to prove. HMRC has a published list of allowable professional journals. Claiming the cost is permitted if the journal is on the authorised list

Business: When any trade takes place with the intention of making a profit it is considered business. At times where profit is made from what could be classed as a hobby, each case is considered on an individual basis

Business Expenses: The outgoings of a business that can be claimed against total income when calculating taxable profits.

Business Income: This is income received by a business that might be taxable. It could be sales or fees and any other sources of income such as investments and capital gains

Business Property Relief: When ownership of a business property is transferred by way of a gift, a potential relief may be claimed against Inheritance Tax. Ownership must have been for at least two years and the amount of relief depends on the owned property. Relief rates are:

  • Up to 100% of a business or interest in a business
  • Up to 100% of unquoted shares in a trading company
  • Up to 100% of unquoted securities in a company together with any unquoted shares which may give the new holder control over the company
  • Up to 50% shares of a quoted company which the donor had control of before gifting

Up to 50% of assets of a quoted company which the donor had control of before gifting

C

Capital Allowances: The purchase cost of an asset is not normally permitted as an expense. This is because the asset retains a value which will decrease over time. Businesses can claim an allowance to reflect the depreciation. This applies to assets with a long life span

Capital Gains – Costs: A number of costs are taken into account:

  • Acquisition and disposal costs: There will be costs associated with buying and selling the asset (broker’s fees for shares is one example)
  • Enhancement costs: Any amount spent on improving, upgrading or repairing the asset

Capital Gains – declaration: This is obligatory where there is a chargeable gain of more than the annual exemption amount. The current amount is £10,600 (2011/12 = £10,600) for individuals, personal representatives and trusts for the mentally disabled, and £5,300 (2011/12 = £5,300) for General Trusts.

Capital Gains Tax: If you own a chargeable asset that goes up in value and you sell it for a profit, you may be charged Capital Gains Tax (CGT). CGT is a tax payable on the increased value of an asset.

The first £10,600 is not taxable as it is covered by the annual exemption. A charge of 18% applies at any amount above that up to the individual’s unused basic rate tax band (at £34,370) and then at 28% once this threshold has been passed.

Capital Losses: If an asset loses value and is sold for less than cost of acquisition, then a capital loss has arisen. This loss can be set against any capital gains in the same year or it may be carried forward to set against potential future capital gains. Sometimes it may be set against other incomes in the same tax year

Cash Equivalent: If an employee receives a taxable company benefit there is no money on which tax may be calculated. Instead, the employer works out the cash value of the benefit received.

Casual Earnings: Defined as the income earned from irregular work.

Certificate of Tax Deposit: There is an option to pay a large tax bill in advance through the purchase from HMRC of Certificates of Tax Deposit. The value of an initial deposit is set at £500 with minimum additions of £250. They can be used against any tax except PAYE, VAT, corporation tax and any tax deducted from payments you have made to contractors

Chargeable Assets: CGT will only apply if the item sold is a chargeable asset. Property is always chargeable unless specific exemptions are in place. The most commonly sold chargeable assets are:

  • Shares
  • Rental properties
  • Business assets
  • Second homes
  • Personal assets worth more than £6000

Non-chargeable assets include:

  • Your main home
  • Personal car
  • investments held in ISA’s, and
  • Personal assets worth less than £6000

Chargeable Event Gains: When money or other benefits are paid out from a life insurance policy it may be considered a chargeable event. The insurance company will advise if the payout is a chargeable event, and what the taxable element is. A tax credit will be given against the chargeable event; only those liable to pay higher rate of tax on their total income will pay additional tax against it. The amount must be declared on your self-assessment tax return

Charitable Gifts Relief: The Gift Aid scheme permits tax relief at the payers top tax rate against charitable donations. Donors are required to make a declaration and donations are treated at net of basic rate tax. In order to obtain the tax relief, the donor must be liable to pay an equivalent amount of income tax. In some circumstances, a taxpayer may claim the donation as having occurred in the previous tax year; this must be made no later than the date the tax return for the previous year is filed, and no later than 31st Jan.

CIS4: A construction industry specific Registration Card for individual subcontractors

Civil Partner: An individual as part of a formal civil partnership.

Civil Partnership: A civil partnership is a same-sex couples partnership treated for tax purposes in the same way as a marriage

Close Company: Businesses are classed in different ways. A close company is where the shareholders number not more than five; this covers most private companies in the UK. The term applies for issues such as capital gains and when claiming tax relief against loans to buy shares.

Commonwealth Citizen: No tax allowances are available to you if you are not a UK resident. Until 5th April 2010 Commonwealth Citizens (including British Citizens) qualified – even when abroad – for full allowances. This changed from the 6th April 2010. Those who previously qualified on grounds of being citizens of the Commonwealth who are presently living in the following areas will no longer receive the allowance: Bahamas, Cameroon, Cook Islands, Dominica, Maldives, Mozambique, Nauru, Niue, St Lucia, St Vincent & the Grenadines, Samoa, Tanzania, Tonga and Vanuatu

This most commonly affects those who receive a pension in the UK but have retired overseas.

Commuting: This is every day travel to and from a place of work and is not usually tax deductible. When a workplace is temporarily moved, or a person works from home and travels to various customers, exceptions may sometimes apply.

Company Car: If the employer provides the employee with a car that is also used for private use, this is classed as a taxable benefit. There are rules on how to work out the amount of benefit

Construction Industry Scheme: CIS is a tax scheme that regulates payments to subcontractors in the Construction Industry. An individual subcontractor should have a CIS4 Registration Card from the Tax Office; the contractor must deduct tax at source before making a payment – this is presently 20%. All payment and tax deduction details must be recorded on the tax deduction voucher.

D

De Minimis: This is the lower limit before a procedure takes effect. A de minimis of £5000 will apply in some cases to low interest loans made by employers to their employees. If the value of the loan is below this limit, then there will be no taxable benefit

Debtors: A debtor is simply somebody who owes you money. When preparing accounts, details of these outstanding payments will be shown

Deductions: These reduce an individual’s total income and consequently their tax liability.

Deferment – National Insurance: If you have a job and are also self-employed then you will be liable for Class 1, 2 & 4 NI (National Insurance). However, contributions will be refunded over and above a certain figure. If your NI contribution for a given tax year will exceed the maximum, it is advisable to apply to defer payment. Seek advice from HMRC or whoever advises you on tax liability to calculate your eligibility for this

Deficiency Relief – Life Insurance policies: It is possible to receive taxable income from a Life Insurance Policy during the period it is held. Termination of the policy should result in more being paid out than what has been paid in. If the amount paid out is less than the value of tax paid out, then too much tax has been paid. If this is the case, then you may claim Corresponding Deficiency Relief

Department for work and pensions: This is the area of government that handles the payment of pensions and state benefits

Depreciation: A major asset that is used by a business retains a residual value that will reduce over its lifespan. “Depreciation” is the term used to describe the reduction in value of the asset; it can be claimed as a deduction against profits. For account purposes, depreciation is classed as “Capital Allowances”

Director: The income of a director is treated as any other employee. However, National Insurance and company benefits are handled differently

Disallowable Expenses: Accounts for business come in two forms:

  • Business accounts: include all income and expenses to reflect a business’ financial situation. This is calculated first and used to calculate profits for tax purposes
  • Accounts for Tax Purposes: This is where expenses that do not qualify for tax relief are removed. These disallowable expenses are added back to net profits to find net taxable profits

Discounted Securities: Securities issued at a discount to private investors will find that special rules apply. Where an issue price is lower than the redemption price (typically more than 0.5% per year between the issue and redemption) those securities are discounted. That increases to 15% if the period exceeds 30 years

The above provisions will not generally include shares, gilt edged securities, indexed securities linked to the value of a share index, life assurance policies or capital redemption policies. No capital gains tax will be charged – instead, income tax will be payable in the tax year that the securities are disposed of, or a redemption is claimed on the profit made.

Discretionary Trusts: This is a Trust where no one individual has a specific right to the trust and the trustees have discretionary power over the trust’s assets and the distribution of its income

Dispensation: All payments made to employees are liable for tax deductions, including business expenses. Employers must advise HMRC of these and the individual must make a separate claim for tax relief. “Dispensation” means that this is not necessary. An employer and the Tax Office agree reimbursement is for only valid business expenses – further that no report or claim is necessary by either party

Disposals: The loss of an asset which could include: gift, theft, swap or loss

Distribution/Dividend: This general term refers to money paid out on investments: shares and unit trusts mostly. Often, the voucher will contain a notional tax credit deduction of 10% and this is non-refundable. If you are liable to pay a higher rate of tax then there will be an additional charge of 22.5% of the gross dividend.

Dividends – Stock or Scrip Dividends: This is where shares are offered in place of a cash dividend

Dividend Upper Rate: If you are liable to pay tax at the additional rate then a further additional charge of 32.5% of gross dividend will apply

Domicile: This is the country that is considered your permanent residence. It is not the same as your nationality or residence as you can only have one domicile at a time

  • Domicile of Origin is inherited from your father
  • Domicile of Choice can change by behaviour such as burial arrangements, location of main assets or other links with another country
  • Domicile of Dependency – if you are legally dependent on another, for example if you are legally a child

Double Taxation: The UK has agreements with other countries regarding tax arrangements. If you are liable to pay tax in the UK and another country, then you may claim relief to ensure that the income is only taxed once

Dual Resident: It is possible to be resident in multiple countries. For tax purposes, this is called “dual residence”. It does not necessarily follow that you will pay double tax. See “Double Taxation” above; there are rules that apply in this case

E

Earned Income: This is the value of money received for work. The term applies to that received from employment, self-employment or directorships

EEA: European Economic Area which consists of the following countries: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Gibraltar, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Switzerland, UK

Elections: This is when individuals have options on how tax affairs are to be organised. An election must take place before the changes can be made. There are several types of election and each has its own rules and time limits

Emergency tax: If a new employee does not have a P45 from previous employment the new employer will use an “emergency tax code” while the Tax Office organises the correct one. It nearly always results in paying the wrong amount of tax

Emoluments: These are all salaries, fees, wages, perquisites, including benefits in kind and profits whatsoever.

Employee: An individual who works for a business and under contract

Employment Pages: Typically, employees do not need to file a Tax Return but may in some limited cases (e.g. if they had benefits in kind). Employment Pages are a set of supplementary pages that come with the standard Tax Return form – they should be filled out and enclosed

Enquiries: HMRC may enquire about your self-assessment tax return up to 12 months from the date they receive your return. If the return is filed late or amended then this period of enquiry is extended to the quarter date following the 12 month anniversary of the filing or amendment. The Quarter Dates are: 31 Jan, 30 April, 31 July or 31 Oct. The enquiry can be about any part of the return. Seek further professional advice of you are unsure what they are asking

Enterprise Investment Scheme: This is a scheme introduced for encouraging investment in smaller high-risk businesses. It provides income tax relief (subject to certain criteria) to external investors, and capital gains tax exemption upon disposal of the shares. There remains the possibility of getting the investment back at a later date

Enterprise Management Incentives: Small higher risk companies might offer enterprise management share options to their employees. Providing that all parties comply with the rules, there should be no income tax or NI contributions to pay when an employee decides to sell those shares acquired under the EMI scheme. Capital Gains Tax relief will date from the time the option was granted, not the date the option it was exercised. It is not required to register the scheme, but when options are granted you must inform HMRC.

Entertainment: This is the provision of a free or subsidised hospitality or entertainment for the purpose of the business: a customer, a potential customer or any other person. There are certain rules that specify whether the entertainment is shown in the company accounts, or on an employee’s P11D – in which case it is taxable

Entrepreneur’s relief: This is for gains made by individuals upon the occasion of the disposal of:

  • All or part of a business
  • Assets of the business after it ceases trading
  • Shares in and securities of the personal trading company, or the holding company of a trading group
  • Assets owned by and used by the personal trading company, group or partnership

Where a disposal has taken place on or after 6th April 2011, the first £10 million of gains qualifying for relief will be taxed at 10%

Estate: This is the total value of a person’s possessions including goods, money and properties. Generally, the term refers to the sum total of the value of possessions of a deceased person

ETI Scheme: The Employee Tax Instalment Scheme operates in Guernsey and is the equivalent of British PAYE. This system is administered by employers using tax codes issued by the tax office.

Ex Gratia: This is a form of payment made by an employer to an employee when there is no legal or contractual obligation for the payment.

Exempt Income: An income that is exempt from paying UK tax. Typical examples include: ISA, premium bond winnings, social security benefits (some but not all) and damages for personal injury.

Expenses – Employment: Expenses are deductions that must be wholly, exclusively and necessarily incurred in the performance of the duties of the work. If they meet these criteria then they qualify for tax relief.

F

FBI: This means that the tax return has been filed online (Filing By Internet)

Financial Year: See “A – Accounting Period”

First Year Allowances: Capital Allowances (the depreciation on business assets) are a 20% “writing down allowance” of the value of the asset at the beginning of the year. There is a higher allowance available for new assets in the first year- this is 40% or 100% depending on the asset. For further details see “Annual Investment Allowance”

Flat Rate Expenses: Where work equipment (such as tools and clothing) is provided by an employee and not made available or reimbursed by the employer, flat rate deductions are permitted. The allowance is dependent on the industry you are employed in

Foreign Earnings Deduction: When the work of a ‘seafarer’ who is typically resident in the UK is performed partially or fully outside of the UK, a deduction may be made against taxable earnings.

Foreign Income: Income that originates outside of the UK. A resident of the UK is generally charged UK tax on worldwide income. There are some exceptions which depend on:

  • Income type
  • The residence status
  • Domicile status

Seek professional advice if you are unsure how your income is categorised.

Form 64-8: This is also known as the “Authorising your agent” form. A taxpayer permits the tax office to communicate with their agent and to deal with them regarding matters that concern HMRC.

Free Standing Additional Voluntary contributions (FSAVCs): These are payments by an employee into a private scheme that is separate from any company scheme. The rules about maximum contributions differ slightly from personal pension schemes

Furnished Holiday Lettings: The following rules apply to relevant properties in the UK and EEA. To be classified as a “furnished holiday letting”, the property must be furnished meet all three of the following criteria:

  • It must be available for holiday letting commercially and to the public for 210 days or more
  • It must be let commercially for 105 days or more
  • Periods of longer term occupation (31 consecutive days or longer) must not have been for more than 155 days during any one year
  • Not occupied for more than 31 days by the same person in any period of 7 months

Since April 2012 loss relief against the general income of the property and terminal loss relief may not be claimed for income tax purposes. This can only be set against income from the same furnished holiday lettings business.

Furnished Lettings: Income tax will be due on rent for furnished residential lettings. “Furnished property” is defined as one that can be occupied without the tenant providing their own furnishings such as a bed, tables, cooker and a whole range of other. If a landlord provides nominal furnishings, this may not meet the requirement. There is a wear and tear allowance of 10% of ‘net rent’ which may be claimed to cover depreciation of furnishings supplied with the accommodation.

G

Gift Aid: The Gift Aid scheme covers donations to charitable organisations, permitting them to donate tax-effectively. There is no minimum limit for gift aid payments.

Golden Handcuff: Also called a ‘Golden Hello’, the term is used to describe a lump sum payment upon commencement of employment.

Golden Handshake: The term used to describe a lump sum payment upon termination of employment. Whether it is taxable depends on whether it is a payment for services or because the job role no longer exists within the organisation

Guernsey Tax: The income tax system of Guernsey is independent from UK. Guernsey tax refunds were made available to all nationalities from 1st Jan 2004.

H

Higher Rate: A higher tax rate applies when an individual’s income exceeds both personal allowance and basic rate of tax. For 2012/13 tax year this was £42475: anyone earning over this paid tax at the higher rate of 40%. Additionally, there is a 50% rate where income exceeds £150,000

Holiday Lettings: See “Furnished Holiday Lettings” above

Homeworker employee: This is where tax relief is available to cover additional household expenses where duties central to the role are carried out at home and nowhere else. Payments made by the employer to an employee for this are income tax exempt. No evidence in support of this arrangement is needed for a value up to £3 pw. The employer is obliged to provide supporting evidence for anything larger than this. However, the employee may still be able to make a claim direct to HM Revenue & Customs for homeworking expenses if the employer does not make a payment. The following conditions must be satisfied:

  • The duties performed by the employee at their home are substantive
  • The employee cannot perform the duties without appropriate facilities
  • The employer does not have suitable facilities on their premises or the employee is required to live too far away for daily commuting

The employee may not have the option between working at the employer’s premises or elsewhere

I

Income for Tax Purposes: “Income for tax purposes” is not necessarily the total income as some income is exempt from the payment of tax

Income from Employment: This is salary or wages, company perks, commissions and expenses – any payment made to employees by their employer

Income from Land and Property: The majority of income from land or property is classed as rental income; this is not always the case but tax will still be due. This income will include that from leases and licenses for land use and way leaves.

Income Tax: Income tax is paid by individuals on a wide range of income types and at various rates. Each will have different allowances.

Incorporation: This is where a business and the sum total of its assets are transferred as a going concern to a company. This transfer is made partly or wholly in exchange for shares which will be issued by the new business

Independent Financial Adviser: These are professionals in the financial industry who offer advice on financial matters, recommending suitable products across the range of the market. They are independent of any other business

Individual Savings Account (ISA): Introduced in April 1999, it is a tax free savings account with an annual limit on the amount that can be invested. They are split into 3 components:

  • Cash
  • Life Insurance
  • Stocks and Shares

Inheritance Tax: This is payable on:

  • Lifetime gifts such as transfers into and out of trust
  • The value of an individual’s estate upon their death
  • Certain gifts made during the last 7 years of the lifetime of the deceased

Investment Income: Any income from any investment which will include:

  • Interest acquired from savings
  • Where shares are held on UK companies, received dividends and accompanying tax credit
  • Discounts or income from held securities
  • Gains made from other sources which are chargeable to income tax – sources such as life insurance policies

IR35 – personal service companies: IR35 is a set of rules which prevent tax and NI payment avoidance through operation via a personal service company rather than direct employment – so called “disguised employment”. Seek professional advice if you are unsure whether it applies to you

J

Job Related Accommodation: Where an employer provides accommodation by reason of employment, it will result in a charge of tax against the accommodation benefit. Exceptions on exist where no tax is charged:

  • Where accommodation is provided in the normal course of family or domestic relationships
  • Where provided by a local authority under normal terms for non-employees
  • Where the employee is a representative occupier such as a caretaker
  • Where it is customary for the employee to expect living accommodation in the performance of their duties (clergymen for example)
  • Where there is an arrangement for special reasons such as security

Joint Tenancy: This is an arrangement where all joint owners have an equal interest in a property. With each successive death, the interest or share of each owner’s part of the property passes to the remaining owner(s) equally. Each owner may break up the joint tenancy – the owners will then hold the joint asset as common tenants

K

K Codes: Where a tax code contains “K”, it means the deductions are greater than the allowances

L

Liability: This is the amount of tax liability due against one’s income, profits or other gains

Lower Rate Tax: This was a tax rate that applied to bank and building society interest. It was 20% but has been replaced with the 10% the Starting Rate for savings. If non-savings related income is above the limit then the 10% starting rate will not apply to savings. Interest on your savings will be taxed at 20% (basic rate).

Loss: This is defined as income being less than expenditure. A loss may be used against other income or subsequent income against the same source

M

Managed Service Companies: Companies through which individuals provide services to clients (not the same as Personal Service companies – see IR35 for that). The individual is likely to be an employee of the MSC rather than a shareholder, director or in business; consequently they will not exercise control of the MSC.

Married Couple`s Allowance: This allowance is now only available to those born before 6 April 1935 – this has been the case since 6th April 2000.

Mileage expenses: See Approved Mileage Allowance Payments

Minimum Wage: National Minimum Wage rates are:

Over 25s: £7.83

Age 21-24: £7.38

Age 18-20: £5.90

Under 18: £4.20

Apprentices: £3.70

 

Money Laundering: New regulations concerning money laundering came into force on 1 March 2004. These apply to businesses operating in the financial sector. Such businesses are legally required to disclose identities and addresses of new clients

N

National Insurance – Class 1: Contributions are based on a percentage of earnings and are paid by employees and their employers. When made by employees they are ‘Primary’ contributions; when made by employers the contributions are ‘Secondary’. If the employee is under 16 years or over pensionable age then primary contributions are not paid

National Insurance – Class 1A: are annual payments by an employer against employees’ taxable benefits that are not chargeable to 1 or 1B NI contributions

National Insurance – Class 1B: This contribution is payable by employers who have a PAYE Settlement Agreement with HMRC

National Insurance – Class 2: This contribution type is for the self-employed. It is a fixed amount of £2.65 per week and paid directly to the NI Contributions Office. If profits are below a certain limit (£5595 for 2012/13) then the individual is exempt from paying the contribution

No contributions are payable if the individual is 16 years or over pensionable age at the start of a tax year.

National Insurance – Class 3: This is a voluntary contribution paid by those who would otherwise not pay enough in contributions to cover the full pension. Present weekly rate is £13.25

National Insurance – Class 4: This rate is paid by a self-employed individual and based on a percentage of their profits over and above a £7605 lower limit. The contribution is payable to HMRC through self-assessment. No contributions are payable if the individual is 16 years or over pensionable age at the start of a tax year.

Net Relevant Earnings: This is the value of total taxable earnings across all sources but excluding income from a job where there is a company pension scheme. This is used to calculate the maximum amount payable into a personal pension scheme, limited to a certain percentage of your NRE

Net rents: This is the total of received rent minus payments for services and other charges that might normally be borne by the tenant but you have paid (typically council tax and utilities).

Non Residence: From the day after their departure, individuals are regarded as non-resident in the UK if they have left for:

  • Full time employment in another country where the employment and non-residence spans a complete tax year
  • They will be a permanent resident abroad

In both cases, return visits must not exceed 183 days in any one tax year or average out at less than 91 days a tax year over a four year period

Non Residence Pages: This is a set of supplementary pages to a standard Tax Return. It applies to individuals who were:

  • Not resident in the UK for all or part of the tax year
  • Not ordinarily a resident of the UK
  • A non-domicile in the UK.

An individual is resident in the UK if they spend minimum of half of a tax year in the country spends at least a quarter of each tax year in the UK on a regular basis.

Non-resident landlord scheme: This is a scheme for taxing the UK rental income of non-resident landlords. UK letting agents deduct a basic rate of tax from any rent collected. If the non-resident landlord does not have a UK letting agent acting on their behalf, where rent is more than £100 per week the tenant must deduct the tax. The letting agent or tenant can remove deductible expenses when working out the amount of payable tax

Non-savings income: This is classed as one of the main types of income for the purpose of tax. It is any income that derives from employment, self-employment, property, share scheme benefits and any other source

NRL6: This is a tax certificate completed by a letting agent or tenant when deducting tax from rental income of a non-resident landlord

O

Occupational Pension: This is a pension established by an employer to provide such benefits to an individual or individuals in relation to their employment

Official Error: When HMRC should have already collected the tax due but have failed to do so or have delayed when information has already been provided, in some cases HMRC could agree not to collect the tax under the ESC A19 concession. The individual must reasonably have believed that the tax affairs were in order and correct.

Ordinary Rate of Tax: The rates available for dividends for the 2009-10 tax year are the 10% ordinary rate and the 32.5% Dividend Upper Rate. From the 2010-11 tax year as well as these rates there is a new Dividend Additional Rate of 42.5%.

Ordinary Residence: This is where you normally live, suggesting permanence and individual liability to income tax, capital gains tax and others in the UK.

Overlap Period: Most of the time, accounts are prepared up to a certain date and the calculated tax is paid on the bottom line amount. Complex rules apply in certain circumstances such as when a business starts or there is a change to the accounting period. There may be some overlap and the accounting period may become taxable across two separate tax years. This means that tax is paid on the income twice. This is called the Overlap Period and a business can claim Overlap Relief to prevent this double charge of income tax

Overlap Relief: On commencement of a business or change of accounting period, the overlap rules have the effect of taxing the same profits in two successive years of assessment. The ‘overlap profit’ is the amount that has been taxed twice. Relief for overlap profit is given by way of a deduction from profits when there is a change of accounting period resulting in a basis period of more than 12 months or, on cessation of the business.

Overpayment Relief: Any individual can claim relief against over payment so long as it is made within four years following the end of the tax year against which the claim is made. You can claim against income tax, capital gains tax and Class 4 NIC. The individual must state the amount they believe they overpaid. They must also state that the claim for relief is under Schedule 1AB TMA 1970. It must also show:

  • Which tax year it is for
  • Grounds for making the claim
  • Any details about any previous appeals
  • Documentary evidence to support the claim.

The signature of the claimant

P

P11D: This document provided to employees who earn £8,500 or over, shows the cash equivalent of their taxable benefits. It includes their salary plus the value of the benefit they receive. The form is completed by the employer with copies going to HMRC and the employee – these must be provided by 6th July following the end of the tax year

P45: Upon leaving a job, you are provided with a P45 by your previous employer. This summarises taxable pay and amount of tax paid up to the date the employee leaves. The P45 comes in four parts:

  • Part 1 – The employer sends this to the tax office
  • Part 1A – Is for the leaving employee
  • Parts 2 & 3 – These are passed to the new employer so that they will deduct the correct level of tax

P50: This is used to claim tax back after an individual has stopped working. It should only be used when:

  • The individual is unemployed, not claiming JSA or Incapacity Benefit. The individual must expect to be unemployed for 4 weeks or more
  • The individual permanently retired and not claiming JSA or Incapacity Benefit
  • The individual is not claiming JSA or Incapacity Benefit and does not expect to either claim or go back to work in any form (which includes part-time and casual employment) before 6th April – the start of the new tax year

P60: Employers must provide this to all employees after the end of the tax year and by 19th May every year. It is a recorded detailing the tax code, taxable pay and tax deducted up to the end of the tax year. In will also show NI contributions and any student loan deductions

P85: When an individual has left or will leave the UK, they must fill in the P85 which determines how the Tax Office will treat the tax affairs of the individual

P86: When an individual is entering the UK for the first time or is returning after a period of absence. It is used by the Tax Office to determine the residence status for income and capital gains tax purposes. Where necessary, it will also determine the individual’s domicile position.

P91: The P91 is used to collect details of a taxpayer’s employment history where and when:

  • The Tax Office is unsure what a taxpayer has been doing since the start of the tax year
  • There are gaps of ten or more work in one’s employment record

P9D: If the employee is paid less than £8500 per year then company benefits are not taxable. The £8500 limit will include their salary plus the cash value of the benefit they receive. The employer is required to advise the revenue of any benefits provided using this form

Pay in Lieu: This term is used to describe a range of payments and reasons for doing so. How the payment is taxed depends on several things: whether it is through a contract, customary or payment of damages.

PAYE: “Pay As You Earn”. Employers are responsible for deducting Income Tax and National Insurance Contributions from your salary and paying the deductions HMRC.

PAYE Coding Notice – P2: The form shows the allowances and deductions used in calculating your tax code. It is used by your employer or pension provider to determine the tax deducted over the year.

Payment on Account: This is where Self-Assessment requires the individual to make payments on account where a tax liability both exceeds £1000 and where less than 80% of the tax liability is collected at source.

Penalties: HMRC have the power to impose penalties where tax revenue has been lost through fraudulent or negligent conduct. Penalties can either be a fixed amount and an evaluation based on the amount of tax lost. HMRC may reduce this amount when taking in individual circumstances

Personal Allowance: The first £8105 of income was tax free for everyone in tax year 2012/3. However, this relief was reduced on incomes over £100,000 by £1 for every £2 of income. This results in the removal of any allowance for incomes that exceed £116,210

Personal Pension Relief: Pension payments are paid as net of basic rate tax. Where the individual is liable to pay a higher rate of tax, or the additional rate, then personal pension relief should be claimed from HMRC directly. For individuals who self-assess, Personal Pension Relief is claimed through self-assessment; in all other cases, the claim must be made separately

Potentially Exempt Transfer: This is any transfer of value from one individual to:

  • Another individual
  • An Accumulation and Maintenance trust
  • A trust for the disabled
  • A trust that creates an interest in possession

They are exempt at the time they are made and remain example so unless the person making the transfer dies within 7 years of the date of the gift

Professional Subscriptions: Where subscriptions are necessary for professional membership of certain bodies, the cost is permitted as business expenses. HMRC has a list of professional bodies against which subscriptions will qualify for tax relief.

Q

Qualifying Loans: You may apply for tax relief against some loans:

  • Those for the purchase of plant or machinery
  • Those used to buy shares in a close company where you own 5% or more of the company and are a full time working officer or employee
  • Those used to purchase land and buildings for business purposes
  • Those used to buy interest in a partnership.
  • Those used to buy a life annuity on the condition that the purchaser is aged 65 or over at the time of purchase
  • Those taken out to be used to pay inheritance tax by a Personal Representative

Those loans used to acquire shares in a ‘co-operative’ business, for lending money to a co-operative business, and/or to repay an existing loan for the stated purposes

R

R38: This form is completed when a taxpayer is due a tax refund and they require the repayment to go to a third person

R40: This form is for claiming a reimbursement of tax deducted from interest. It gives details of total taxable income and deductions in any one tax year

Redundancy Payments: If an employee has been in continuous employment for two or more years and their employment has been terminated as the job no longer exists, this is a payment made in compensation; they will also include pay in lieu and golden handshakes. There is a statutory limit of £30,000 above which income tax is chargeable. Only one limit applies per annum.

Remittance Basis: UK residents usually have to pay tax on worldwide income and generally will not always apply to individuals classed as non-domicile. In such cases, tax will only be due on foreign income when brought into the UK. Individuals taxed on the Remittance Basis will typically lose personal allowance entitlement and exemption from capital gains tax, subject to a £2000 de minimis. Those who choose to be taxed in this way and have been resident in the UK resident for longer than 7 of the past 10 years are required to pay a fee of £30000

Rent A Room Scheme: Where received rents from letting furnished accommodation in your only or main residence are under £4,250 per year, you are exempt from tax. However, if rental income exceeds this threshold then you will pay tax on:

  • Gross rents minus the expenses associated with the rental
  • Or without deducting the expenses, the amount by which the rents exceed the maximum

If the income is received jointly, the exemption is split.

Rental Expenses: Generally fall into two categories.

  • Revenue expenses: These are ongoing expenses deducted from the rental income to calculate the profit. They may include, amongst other things, fees for agents and house insurance
  • Capital Expenses: These are expenses associated with the fabric of the property – an extension to a house, new wiring or increasing the property’s value. These expenses may only be claimed against future capital gains tax

Rental Income: This is taxable income from land and property and classed as investment income. In contrast, income from Furnished Holiday Lettings is treated as trading income.

Residence: If you are resident in the UK, you will pay UK tax on income from sources worldwide. An individual is classed as resident in the UK where they spend more than 183 days in the UK in a particular year, or more than 91 days on average in any tax year. If you are present in the UK at midnight on any one day, you are classed as being in the UK for residence purposes on that day

Retirement Annuity Payments: This is a type of personal pension scheme phased out in 1988. No new contracts have been created since July that year though it is still possible for existing agreements and the individuals that hold them to make contributions

The payments made are allowable for tax purposes, although there is a limit on the amount that can be paid into a scheme each year depending on your age at the beginning of the tax year.

Unlike personal pension scheme contributions, no tax relief is given at source. It must always be claimed separately.

R&D Tax Credits: Research and Development Tax Credits are a way for the government to encourage investment in innovation. It applies to all UK registered, incorporated companies that invest in eligible development of products, processes or services. It can be quite complex and its wise to consult an expert, but it can be very lucrative.

S

Savings Interest: This is defined as investment income and is therefore liable to a charge of income tax. Tax will generally be deducted at source at a 20% rate. In April 2008, a 10% starting rate was introduced for savings income. The rate of income tax you pay against your savings income is dependent on your total income.

  • If total income is less than your personal allowances (this will include your savings income) you will not have to pay any tax. In this instance inform the bank or building society that they should not deduct tax
  • If total income (not including savings) is less than your personal allowance plus the lower rate tax limit, then you will be liable to pay tax at only 10% on your savings
  • If total income (including savings) is lower than the personal allowance plus basic rate limit, the savings you have will be liable to tax deducted at 20%. In most cases, this will be covered by the tax deducted at source
  • if your total income (including savings) exceeds the personal allowance plus the basic rate limit, then you will be liable to tax at 40% on part or the total of your savings income
  • if your total income (including savings) exceeds the personal allowance plus higher rate tax limit, then you will be liable to tax at 50% on part or the total of your savings income

Seafarers: For the purposes of tax, seafarers are those who are ordinarily resident in the UK or EU and EEA and perform duties wholly or partly outside the UK (such as on a ship). Duties performed on shore are incidental to the on board duties; this will not include offshore installations

Seafarers Earnings Deduction: SED is a tax relief available to seafarers also known as FED – Foreign Earnings Deduction. It is deducted from the individual`s taxable income; it applies where duties of a seafarer ordinarily resident in the UK are performed outside the UK – in whole or in part. SED may result in a refund of 100% of the tax paid under PAYE

Self-assessment tax return: The main form used by the Tax Office to all individuals who must report their income and pay tax. Most people pay through PAYE so are not required where their total earnings come from employment. In some cases employed individuals need to file a Tax Return.

Self-Employment Pages: This is a set of extra pages that are additional to the standard Tax Return form. Individuals must fill them in if they carried on a trade, profession or vocation at any time during a given tax year and were therefore self-employed in the UK or abroad.

Self-employment tax (or Self-employed tax): This is a colloquial phrase used to refer to tax deducted at source from payments made to subcontractors under the CIS Scheme.

Starting Rate for Savings: From tax year 2008-09, there has been a 10% starting rate used for savings income. The 10% starting rate will not apply to you if your non-savings income is above this limit

Stock or Scrip Dividends: This is the term used in cases where shares are offered in place of a cash dividend

Surcharges: If tax is unpaid over 28 days after the due date, the individual will be liable to a pay extra 5% of the unpaid tax as a surcharge. If it is still unpaid after six months, then an additional 5% will be levied. Daily interest will also accrue

T

Tax Avoidance: This is where tax rules are used to personal advantage. If you have used a scheme or arrangement to obtain a tax advantage you are required to disclose the details to HMRC. Failure to do so will result in penalties

Tax Code: This is used by employers to calculate tax liability and deduct it at source from payments made to their employees. The tax code denotes allowances and deductions and is calculated by adding allowances then removing deductions. This formula gives an individual’s net allowance which is then converted into a tax code

Tax Evasion: This is illegally reducing a tax bill, where:

  • Income is understated
  • Claiming excessive expenses
  • The nature of a transaction is deliberately falsified

You may face criminal prosecution in any of the above and required to pay the tax lost, interest and any due penalties

Tax on interest: This is a tax deducted from savings income taken at a rate of 20% at source. If an individual’s total taxable income for the tax year is below the taxable threshold, the individual may reclaim all or part of the tax deducted from their savings

Tax Year: The tax year in the UK runs from the 6th April in one year to 5th April in the next year. Sometimes this is called the Year of Assessment.

Tenancy in Common: This is where:

  • The owners have unequal interests in a property
  • The interest of any owner of a property will pass on death through the will. If no will exists, it will pass under intestacy rules
  • The share of a tenant in common will typically be in proportion to the proportion of investment they put into the property

Termination Payments: Also known as Redundancy Payments

Trading Losses: There are a number of ways that you can claim for losses as a sole trader or partnership:

  • You may carry them forward against later profits
  • They may be set against general income in the tax year of loss and/or the previous tax year. In either case, in either year, the claim may be set off against capital gains
  • In a new trade, they may be carried back against general income of the three previous tax years – starting with the earliest

Where trade ceases, they may be set against trading income of the final tax year. After this they can carry back against trading income of the three previous tax years – starting with the latest

U

Underpayment: This is the tax that is calculated and due at the end of the tax year.

UTR – Unique Tax Reference: This 10 digit reference number is allocated to those who need to use the self-assessment tax system

V

VAT: Value Added Tax is charged against goods and services, applying to a taxable person in the course of a business. The legislation is generally complex so seek professional advice on VAT.

W

Wear & Tear Allowance: This is a 10% deduction against the ‘net rents’ of furnished lettings. It covers depreciation of value of items such as furniture and fridges that are supplied as part of the accommodation. If it is not furnished, or is only part-furnished, this 10% allowance is not payable

Withholding tax: This is tax on an income and deducted at source. It is diverted directly to the government so the recipient never sees it. Generally it is used internationally in tax treaties to assist collection of tax

Y

Year of Assessment: Or tax year, it goes from the 6th April in one year to the 5th April in the next year

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