UK Tax Glossary Explained.

A tax code is a short alphanumeric string issued by HMRC to tell an employer or pension provider exactly how much income tax to deduct from your pay each period.

PAYE (Pay As You Earn) is the system HMRC uses to collect Income Tax and National Insurance directly from your salary or pension before you receive it, so you never hold the tax yourself.

A P60 is an official end-of-year certificate issued by your employer showing your total pay and the income tax and National Insurance deducted from it during the tax year, used as proof of earnings and tax paid.

The Personal Allowance is the amount of income you can receive each tax year before you start paying Income Tax; for 2025/26 it is £12,570 and applies to most UK taxpayers automatically.

A P45 is a document your UK employer must give you when your employment ends, showing your tax code, total pay and tax paid so far in the current tax year, which your new employer or HMRC uses to ensure you continue paying the right amount of tax.

A sole trader is a self-employed individual who runs an unincorporated business as themselves, keeping all profits after tax but bearing unlimited personal liability for the business's debts, and paying Income Tax and National Insurance on profits through Self Assessment.

Emergency tax is a temporary, usually higher rate of income tax deducted by an employer or pension provider when HMRC does not yet hold enough information about your income or tax code to calculate the correct amount to deduct.

National Insurance (NI) is a compulsory UK tax on earnings and profits that funds the State Pension and certain benefits, paid by employees, employers and the self-employed above set income thresholds.

Self-employed means working for yourself rather than for an employer, running your own business and taking responsibility for its success or failure, with income taxed through Self Assessment rather than having tax deducted at source through PAYE.

VAT (Value Added Tax) is a consumption tax added to the price of most goods and services in the UK, charged at a standard rate of 20%, which VAT-registered businesses collect on their sales (output VAT) and reclaim on their purchases (input VAT), paying the difference to HMRC.

Self Assessment is HMRC's system for collecting Income Tax and National Insurance from people whose tax cannot be fully deducted at source, requiring them to file an annual tax return declaring their income, expenses and any tax owed.

Making Tax Digital (MTD) is HMRC's programme to modernise the UK tax system by requiring businesses and individuals to keep digital records and submit updates to HMRC using compatible software rather than paper or manual returns.

A limited company is a business registered at Companies House as a separate legal entity from its owners, where the shareholders' liability is limited to what they invested, the company pays Corporation Tax on its profits, and directors can draw income as a mix of salary and dividends.

IR35, also known as the off-payroll working rules, is UK tax legislation that targets contractors who work through their own limited company but are, in substance, employees of their client, requiring them to pay broadly the same Income Tax and National Insurance as an employee would.

Income tax is a tax charged on most types of income, including wages, self-employment profit, pensions and savings, above your tax-free Personal Allowance. The rate you pay rises in steps as your income crosses each tax band.

A Unique Taxpayer Reference (UTR) is a permanent 10-digit number HMRC assigns to you when you register for Self Assessment, used to identify your tax record on every return, payment and correspondence.

Marriage Allowance is a UK tax relief that lets one spouse or civil partner transfer up to £1,260 of their unused Personal Allowance to the other, reducing the recipient's tax bill by up to £252 a year.

A P11D is a form employers submit to HMRC each year declaring the cash value of any benefits and non-exempt expenses they have provided to employees or directors, so the correct amount of income tax and National Insurance can be charged.

A tax rebate (or tax refund) is a repayment HMRC makes to a taxpayer who has paid more income tax than they actually owed for a tax year, whether through PAYE, Self Assessment, or an incorrect tax code.

Corporation Tax is the UK tax that limited companies and some other organisations pay on their taxable profits, including trading profits, investment income and chargeable gains, charged at 19% on profits up to £50,000 and 25% on profits over £250,000 for the 2025/26 financial year.

CIS (the Construction Industry Scheme) is an HMRC scheme under which contractors deduct money from payments to subcontractors and pass it to HMRC as an advance towards the subcontractor's Income Tax and National Insurance, normally at 20% for registered subcontractors and 30% for unregistered ones.

Capital Gains Tax is a UK tax on the profit (the gain) you make when you sell or dispose of an asset that has increased in value, such as shares, a second property, or a business. You are taxed on the gain, not the total sale price.

Stamp Duty Land Tax (SDLT) is the tax you pay when you buy a property or land over a certain price in England and Northern Ireland. It is charged in bands on the portion of the price within each band, similar to Income Tax.

HMRC (His Majesty's Revenue and Customs) is the UK government department responsible for collecting taxes, paying certain benefits, enforcing the minimum wage, and administering systems such as PAYE, Self Assessment and Making Tax Digital.

Salary sacrifice is an arrangement where an employee agrees to give up part of their gross salary in return for a non-cash benefit, such as a pension contribution, reducing the pay on which Income Tax and National Insurance are charged.

The UK tax year is the 12-month period running from 6 April in one calendar year to 5 April the next, used by HMRC to calculate income, tax and National Insurance for individuals and businesses.

UK tax bands are the income ranges to which different rates of income tax apply, so that the first slice of your earnings above the Personal Allowance is taxed at 20%, a higher slice at 40%, and earnings above £125,140 at 45%.

A benefit in kind (BIK) is any non-cash perk or asset an employer provides to an employee or director that has a taxable monetary value, such as a company car, private medical insurance or interest-free loan.

Payments on account are two advance payments towards your next year's Self Assessment tax bill, each equal to 50% of your previous year's liability, due on 31 January and 31 July.

A dividend is a payment a limited company makes to its shareholders out of profits remaining after Corporation Tax, taxed in the recipient's hands at dividend rates of 8.75%, 33.75% or 39.35% in 2025/26 depending on their Income Tax band, after a tax-free Dividend Allowance.

The VAT threshold is the level of VAT-taxable turnover (£90,000 in 2025/26) above which a UK business must register for VAT with HMRC. It is measured on a rolling 12-month basis, not per tax year.

Government Gateway is the UK's online identity and sign-in system that lets you access HMRC and other government services, using a unique 12-digit user ID and password plus two-factor authentication.

Company car tax is the income tax you pay on the private use of a car provided by your employer; HMRC treats it as a benefit in kind and calculates the taxable amount by multiplying the car's list price by an appropriate percentage based on its CO2 emissions, then taxing that at your marginal rate.

An ISA (Individual Savings Account) is a UK tax wrapper that lets you save or invest up to a set annual limit, £20,000 in 2025/26, with all interest, dividends and capital gains earned inside it completely free of income tax and capital gains tax.

Payroll is the process by which an employer calculates and pays its employees' wages, deducts the correct income tax and National Insurance under PAYE, accounts for pensions and other deductions, and reports the figures to HMRC in real time each pay period.

Gross income is the total amount you earn before any tax, National Insurance contributions, pension deductions or other withholdings are taken off.

A National Insurance number (NINO) is a unique, permanent eight-character reference assigned to every UK taxpayer that identifies your contributions to the National Insurance system and links your tax, benefits and pension records.

Taxable income is the portion of your total income that HMRC can legally charge income tax on, calculated after subtracting allowances, reliefs and exempt income from your gross earnings.

Tax relief is any provision in UK law that reduces the amount of tax you pay, either by deducting an amount from your taxable income or by giving back tax you have already paid on qualifying spending such as pension contributions or business expenses.

Capital allowances are a form of tax relief that lets businesses deduct the cost of qualifying assets — such as equipment, machinery, tools and certain vehicles — from their taxable profits, in place of the accounting depreciation HMRC does not allow.

The Trading Allowance is a £1,000 tax-free allowance that lets individuals earn up to £1,000 of gross trading, casual or miscellaneous income in a tax year without paying tax on it or, in most cases, having to register for Self Assessment.

The High Income Child Benefit Charge (HICBC) is a tax charge that gradually claws back Child Benefit when the higher earner in a household has adjusted net income above £60,000, with full repayment once income reaches £80,000.

Pension tax relief is the government top-up on money you pay into a pension. Contributions are effectively made before tax, so you get back the Income Tax you would otherwise have paid, at 20%, 40%, or 45% depending on your rate.

A profit and loss statement (P&L) is a financial summary showing your total income, your total expenses, and the profit or loss left over for a given period. For a sole trader, the profit figure is what income tax and National Insurance are calculated on.

Net profit is the amount left over once all business costs, including overheads, expenses and any interest, have been deducted from total income. For a sole trader it is the bottom-line figure on which income tax and Class 4 National Insurance are charged.

A payslip is an itemised statement an employer must give an employee on or before payday, showing gross pay, the deductions taken (tax, National Insurance, pension and others) and the resulting net pay.

Gross pay is the total amount you earn in a pay period before any deductions such as Income Tax, National Insurance and pension contributions are taken off.

Gift Aid is a UK tax relief that lets registered charities reclaim the basic-rate income tax on donations made by UK taxpayers, adding 25p to every £1 given; higher and additional-rate taxpayers can also claim back the difference between their rate and the basic rate through Self Assessment.

Tax evasion is the illegal non-payment or underpayment of tax by deliberately concealing income, falsifying records, or failing to declare earnings to HMRC; it is a criminal offence in the UK that can lead to financial penalties, repayment with interest, and in serious cases prosecution and imprisonment.

Class 4 National Insurance is a profit-based contribution paid by self-employed people in the UK, charged as a percentage of annual profits above a set threshold and collected through Self Assessment.

Net income is the amount of money you are left with after all taxes, National Insurance contributions and other mandatory deductions have been subtracted from your gross earnings.

Higher rate tax is the 40% Income Tax charge applied to the portion of a UK taxpayer's income that falls between £50,270 and £125,140 in the 2025/26 tax year.

A P800 is an official tax calculation letter sent by HMRC to PAYE employees and pensioners when their records show they have paid too much or too little income tax during the tax year.

Allowable expenses are the everyday running costs of a business that HMRC lets you deduct from your income before calculating tax, provided they are incurred wholly and exclusively for business purposes.

Student loan repayment is the income-contingent deduction taken from your earnings once they pass a repayment threshold. You repay a percentage of income above the threshold, collected through PAYE or Self Assessment, not a fixed monthly amount.

The Personal Savings Allowance (PSA) is the amount of interest you can earn tax-free each year: £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers, and £0 for additional-rate taxpayers in 2025/26.

Mileage allowance is the amount you can claim, tax-free, for using your own vehicle for business travel. HMRC sets flat Approved Mileage Allowance Payments (AMAP): 45p per mile for the first 10,000 business miles a year and 25p thereafter for cars.

Turnover is the total income a business generates from its normal trading activities over a period, before deducting any expenses. It is the "top line" of your accounts, and it determines whether you must register for VAT.

Something is tax deductible when its cost can be subtracted from your income before tax is calculated, reducing your taxable profit. For the self-employed, an expense is deductible if it is incurred wholly and exclusively for the purposes of the business.

Gross profit is the amount left when you subtract the direct cost of producing your sales (the cost of goods or services sold) from your total income. It measures how profitable your core trading activity is, before overheads are taken into account.

A VAT return is the periodic report a VAT-registered business sends to HMRC, usually every quarter, declaring the VAT charged on sales (output VAT) and the VAT paid on purchases (input VAT). The difference determines whether the business pays HMRC or receives a refund.

An emergency tax code is a temporary tax code applied by an employer or pension provider when HMRC does not yet have enough information to issue your correct code, usually taxing you on a non-cumulative basis or with no Personal Allowance.

Scottish income tax is the version of UK income tax that applies to the non-savings, non-dividend income of Scottish taxpayers; the Scottish Parliament sets its own rates and bands, which for 2025/26 create six tax bands (starter, basic, intermediate, higher, advanced and top) instead of the three used in the rest of the UK.

Tax avoidance is the use of legal methods to reduce a tax bill; it ranges from straightforward planning that the rules clearly intend, such as paying into a pension, to aggressive contrived schemes that exploit loopholes against the spirit of the law and that HMRC can challenge under rules like the General Anti-Abuse Rule.

Class 2 National Insurance is a flat-rate weekly contribution paid by self-employed people in the UK that counts towards your State Pension and certain other benefits, provided your profits exceed the Small Profits Threshold.

Take-home pay is the amount of money an employee or worker actually receives after all deductions, including income tax, National Insurance contributions, and any pension or student loan payments, have been subtracted from gross pay.

MTD for ITSA (Making Tax Digital for Income Tax Self Assessment) is the part of HMRC's digital programme that requires self-employed people and landlords above set income thresholds to keep digital records, send quarterly updates, and file a final declaration instead of a single annual tax return.

The CGT allowance, officially the annual exempt amount, is the total amount of capital gains you can make in a tax year before any Capital Gains Tax is due. For 2025/26 it is £3,000, and it cannot be carried forward if unused.

Rental income is the money a landlord receives from letting out property, including rent and certain tenant payments. It is taxed as part of your income after deducting allowable expenses, at your normal Income Tax rate.

The pension annual allowance is the maximum total you can contribute to your pensions in a tax year while still receiving tax relief. For 2025/26 the standard allowance is £60,000, including employer contributions, with reductions for high earners.

Cash basis accounting records income only when money actually reaches your account and expenses only when you actually pay them, ignoring invoices that are still outstanding — a simpler method that is now the default for UK sole traders.

The Flat Rate VAT Scheme is a simplified VAT arrangement for small businesses, where you charge customers the normal 20% VAT but pay HMRC a single fixed percentage of your gross (VAT-inclusive) turnover, rather than calculating output VAT minus input VAT on every return.

A tax-free allowance is an amount of income or gains you can receive in a tax year before any tax becomes due, the most important being the Personal Allowance for income tax.

A late filing penalty is a charge HMRC applies when you submit your Self Assessment tax return after the deadline. It starts at a fixed £100, then escalates with daily penalties after three months and percentage-based penalties after six and twelve months, regardless of whether any tax is owed.

Tax residence is your status under the UK Statutory Residence Test, which decides whether HMRC treats you as UK resident for a tax year; a UK resident is generally taxed on worldwide income, while a non-resident is taxed only on UK-source income.

Basic rate tax is the 20% income tax rate applied to taxable earnings between £12,571 and £50,270 in 2025/26, covering the majority of UK employees, sole traders and self-employed workers.

The Annual Investment Allowance (AIA) is a capital allowance that lets a business deduct the full cost of qualifying plant and machinery — up to £1 million a year — from its taxable profits in the year of purchase.

The Dividend Allowance is the amount of dividend income you can receive each tax year before any dividend tax is due, set at £500 for 2025/26, after which dividends are taxed at 8.75%, 33.75% or 39.35% depending on your Income Tax band.

Adjusted net income is your total taxable income from all sources, minus specific reliefs such as gross pension contributions and Gift Aid donations. HMRC uses it to decide your Personal Allowance and the High Income Child Benefit Charge.

A basis period is the stretch of trading profit that is taxed in a given tax year. Since the 2024/25 reform, the basis period for sole traders and partnerships is simply the tax year itself — 6 April to 5 April.

Reverse charge VAT is a mechanism where the customer, rather than the supplier, accounts for the VAT on a transaction. The supplier issues an invoice with no VAT added, and the VAT-registered customer records both the output and input VAT on their own VAT return.

Business Asset Disposal Relief (formerly Entrepreneurs' Relief) is a Capital Gains Tax relief that charges a reduced rate on qualifying gains when you sell all or part of a business, with a £1 million lifetime limit. The rate is 14% in 2025/26, rising to 18% from April 2026.

Domicile is a general-law concept describing the country a person treats as their permanent home; for UK tax it historically determined how foreign income, gains and assets were taxed, though from 6 April 2025 a residence-based regime replaced the long-standing non-domiciled (non-dom) rules.

Your marginal tax rate is the rate of income tax you pay on each additional pound you earn, determined by whichever tax band your next pound of income falls into.

Simplified expenses are a set of HMRC flat rates that let self-employed people claim for vehicles, working from home and living on business premises without calculating the actual costs and splitting business from private use.

A quarterly update is a digital summary of a business's income and expenses for a three-month period, submitted to HMRC through compatible software under Making Tax Digital for Income Tax, four times a year.

The property allowance is a £1,000 tax-free allowance for income from property. If your property income is £1,000 or less you may not need to declare it; above that, you can deduct £1,000 instead of your actual expenses.

Week 1 Month 1 (shown as W1, M1 or X) is a non-cumulative instruction on a tax code telling your employer to tax each pay period on its own, giving only that period's share of your Personal Allowance and ignoring everything earned and taxed earlier in the year.

An accounting period is the span of time that a set of business accounts covers — typically twelve months — over which you add up income and expenses to arrive at the profit reported to HMRC.

Depreciation is the accounting method of spreading the cost of a long-lived asset over the years you use it. In UK tax, depreciation is added back and disallowed — HMRC grants capital allowances instead to give tax relief on the same assets.

Input VAT is the value added tax a VAT-registered business pays on the goods and services it buys for the business. It can usually be reclaimed from HMRC by subtracting it from the output VAT charged on sales, so VAT becomes a tax on value added rather than a cost to the business.

Deductions are amounts subtracted from an employee's gross pay before they receive their net pay, including statutory deductions such as Income Tax and National Insurance and voluntary ones such as pension contributions.

The badges of trade are a set of indicators developed by the UK courts and used by HMRC to decide whether a transaction or series of transactions amounts to trading, taxed as income, or is instead a capital disposal or hobby, helping draw the line between a business and a one-off sale.

A CIS deduction is the amount a contractor withholds from a subcontractor's labour payment under the Construction Industry Scheme and pays to HMRC as an advance towards the subcontractor's Income Tax and National Insurance, normally 20% for registered subcontractors and 30% for unregistered ones.

The Self Assessment payment deadline is the date by which you must pay the tax you owe for a tax year. The main deadline is 31 January following the end of the tax year, when both the balancing payment and the first payment on account fall due; a second payment on account is due on 31 July.

Output VAT is the value added tax a VAT-registered business charges on the goods and services it sells, collected from customers on behalf of HMRC and reported on the VAT return.

Additional rate tax is the highest UK income tax band, charged at 45% on any taxable income above £125,140 in 2025/26, applying in England, Wales and Northern Ireland.

A balancing payment is the amount that settles the difference between the total Self Assessment tax you actually owed for a tax year and the payments on account you have already made towards it, due on 31 January after the tax year ends.

The Personal Allowance taper reduces your tax-free Personal Allowance by £1 for every £2 of adjusted net income above £100,000, removing it entirely at £125,140 and creating a 60% effective marginal tax rate in between.

A Notice of Coding, issued on form P2, is the letter or online statement from HMRC that explains exactly how your tax code was calculated, listing your allowances, any deductions, and the resulting code sent to your employer or pension provider.

The accruals basis records income when it is earned and expenses when they are incurred — when the work is done or the cost is committed — regardless of when the money actually changes hands. It is the traditional accounting method and is mandatory for limited companies.

A tax underpayment is an amount of Income Tax you owed for a tax year but did not pay, usually because too little was deducted through PAYE or your circumstances changed during the year.

Welsh income tax is the part of income tax on the earnings of Welsh taxpayers that is set by the Senedd; under the Welsh Rate of Income Tax (WRIT), Westminster reduces each UK rate by 10p and the Senedd adds its own Welsh rate back on, which for 2025/26 is 10p in every band, leaving Welsh rates identical to England and Northern Ireland.

RTI (Real Time Information) is the system under which UK employers report payroll details, the pay, tax and National Insurance for every employee, to HMRC electronically on or before each payday, rather than only once at the end of the tax year.

Residential property Capital Gains Tax is the tax charged on the profit when you sell or dispose of UK residential property that is not your main home, such as a buy-to-let or second home, taxed at 18% or 24% in 2025/26, with the gain reported and paid to HMRC within 60 days of completion.

Late payment interest is the daily interest HMRC charges on tax paid after its due date. It is set at the Bank of England base rate plus 4 percentage points (4.25 points from April 2025), runs from the day after the deadline until the tax is paid, and is separate from any late-payment penalties.

1257L M1 is an emergency, non-cumulative tax code: it gives the standard 2025/26 Personal Allowance of £12,570 but applies it month by month in isolation, ignoring your earlier pay and tax in the year, which often means you are overtaxed until a cumulative code is restored.

An End of Period Statement (EOPS) was the originally proposed end-of-year confirmation step in Making Tax Digital for Income Tax, in which a sole trader or landlord declared that the quarterly figures for each business were complete and correct; HMRC scrapped it in 2024 and merged its purpose into the single Final Declaration.

A cumulative tax code is the standard PAYE code that calculates your tax on your total pay and allowance for the year to date, so any over- or under-deduction in an earlier period is automatically corrected in the next payday.

Blind Person's Allowance is an additional tax-free amount, on top of the Personal Allowance, given to people who are registered as blind or severely sight-impaired, reducing the Income Tax they pay.

A tax overpayment is an amount of Income Tax you paid in excess of what you actually owed for a tax year, which HMRC repays as a refund or credits against future tax.

The starter rate for savings is a 0% band of up to £5,000 that lets people with low non-savings income earn savings interest tax-free; the £5,000 allowance is reduced pound for pound by any non-savings income above the £12,570 Personal Allowance, so it suits pensioners and low earners in particular.

A reasonable excuse is a genuine, unexpected event outside your control that stopped you meeting a tax obligation on time. If HMRC accepts it, the related late filing or late payment penalty is cancelled, provided you put things right without unreasonable delay once the excuse ends.

Digital records are the electronic records of income and expenses that Making Tax Digital requires sole traders and landlords to keep in HMRC-recognised software, replacing paper books and standalone spreadsheets, with each transaction captured digitally and connected by digital links rather than manual re-typing.

A non-cumulative tax code, shown with a W1, M1 or X suffix, taxes each pay period on its own, giving only that period's slice of Personal Allowance and ignoring everything you earned or paid earlier in the year.

The first payment on account is an advance instalment toward your next Self Assessment tax bill, equal to half of your previous year's tax liability and due by 31 January.

CIS verification is the process where a contractor checks a subcontractor's status with HMRC before paying them, which tells the contractor whether to deduct tax at 20% (registered), 30% (unregistered) or 0% (gross payment status), and returns a verification reference number.

Penalty points are HMRC's points-based system for late submissions. Each late return or update earns one point; when your points reach a threshold (set by how often you file), a fixed £200 penalty is charged, and a further £200 applies for each subsequent late submission while you remain at the threshold.

The Final Declaration is the year-end confirmation step in Making Tax Digital for Income Tax, in which a sole trader or landlord finalises their figures, claims reliefs and allowances, adds any other income, and confirms the return is complete and correct by 31 January following the tax year.

A K code deduction is the extra taxable income a K tax code adds to your pay each period. It is used when your taxable benefits or unpaid tax exceed your Personal Allowance, turning the allowance negative so HMRC can collect the extra tax through payroll.

A PAYE coding notice, also called a P2 or notice of coding, is a statement from HMRC that tells you and your employer your tax code for a tax year and explains how that code was worked out.

Disguised employment is where someone provides their services through an intermediary, usually their own limited company, but works in a way that, ignoring the company, would make them an employee of the client, an arrangement the IR35 off-payroll rules are designed to tax like ordinary employment.

A week 53 payment is an extra weekly (or fortnightly/four-weekly) payday that lands on 5 April in some tax years, creating a 53rd pay period; HMRC requires employers to tax it on a non-cumulative week 1 basis, which gives an extra slice of tax-free pay and can leave a small underpayment to settle later.

Deemed employment is the tax treatment that applies when an engagement is found to be inside IR35: the contractor's fee is treated as if it were employment income, so Income Tax and National Insurance are charged on a "deemed employment payment" just as they would be on a salary, even though no actual employment contract exists.

The cash equivalent of a benefit in kind is the taxable monetary value HMRC places on a non-cash perk an employer provides, calculated under set rules; this figure is reported on form P11D and added to your taxable income so the right amount of tax can be collected.