A comprehensive guide to UK tax definitions and accounting terms

*This blog was first published in July 2015 and has been updated with new information for accuracy.

Key UK tax dates

The UK tax and calendar years do not run simultaneously so a little knowledge can make a world of difference when filing your taxes.

See also: A complete tax calendar for UK contractors and freelancers

Accounting Period

A time period that covers specific accounting functions; it can be a calendar year or a fiscal year, but it can also be a week, month, or quarter. During this time, financial statements are prepared. It enables investors to compare results over multiple time periods.

Financial year

This period begins on the day on which the company commenced business, as stated in the registration at Companies House, and ends one year later, on the day before that date. The financial year of a limited company usually coincides with the accounting period for corporation tax.

Tax year

The 12-month period covered by a tax return. A UK tax year runs from 6 April to 5 April of the following year.

Money matters

Accountants provide a third-party perspective on spending practises by offering an informed second opinion and clarifying business expenses such as employee compensation. Here are a few terms you might come across. 

Cash flow

Simply put, cash flow refers to the movement of money into and out of a business. Cash flow can be either positive or negative. It is calculated by subtracting the cash balance at the beginning of a period, also called the opening balance, from the cash balance at the end of the period, or the closing balance.

Turnover vs revenue

Turnover is the total amount that a business generates in a given period. It is used to show the efficiency of a business and can include selling inventory, but also working capital, accounts receivable and portfolio turnover.

Revenue refers specifically to the money earned by businesses from the sale of goods or services for a fee. It is used to show the profitability of a business.

Expenses

The costs incurred by a business to generate revenue. There are two main categories of business expenses in accounting:

• Operating expenses – arise from the main, day-to-day activities of the business
• Non-operating expenses – not directly related to the business's core operations. E.g. interest charges on debt

Net Profit vs Gross Profits

Net profit is the sales income minus all the business costs. Contrasting to net profit, the gross profit is the sales income minus the direct costs of getting the article to sale.

Payroll

The remuneration that a company must pay its employees for a certain period or on a given date. As an employer, you normally have to operate PAYE as part of your payroll. PAYE is HM Revenue and Customs (HMRC) system to collect Income Tax and National Insurance from employment. Other payroll deductions employers must consider include:

• Student and postgraduate loan repayments
• Pensions
• Child maintenance payments

In small businesses, payroll may be handled directly by the owner or an employee, while larger businesses may choose to outsource the majority of payroll to a third party that specialises in this activity.

Remittance

Money sent from one party to another. If you make payments to suppliers, you can create a remittance advice – a statement that accompanies a payment, detailing what's been paid. This is particularly useful if you make a single transfer that covers several payments.

Business structures and profits

Entrepreneurs from all over the world choose to set up businesses in the UK because it is an entrepreneur-friendly country with lower start-up costs than most other developed countries, has a skilled workforce, and offers a high return on investment. If you’re considering setting up a UK business, or business relocation to the UK, here are the terms you’ll need to be familiar with.

Business (or legal) entity

In simplest terms, a business entity is a company or organisation that has legal rights and responsibilities, including tax filings. It can enter into contracts either as a vendor or a supplier and can sue or be sued in a court of law.

There are four main types of business structure in the UK, including a sole proprietor and a limited company. Each has various tax and liability implications for owners and shareholders. 

Sole proprietorship

Also known as a sole trader or a proprietorship, this is an unincorporated business owned and managed by one person. It is the simplest type of business structure because the business and the owner are not legally separate. If a sole proprietorship grows significantly, it can be transferred to another, more complex business structure.

As a sole proprietor, the profits of your business are added to your own income. One advantage is that these taxes are filed as part of your personal tax return and there are no other obligations. However, these profits can push you into higher tax band. Once your business has grown to the point where the taxes you pay on your business are equal to or higher than the corporation tax you would have to pay, it is worth registering your business as a limited company.

Limited company

The term "limited company" refers to a type of organisation in which the assets and income of the owners are separate from the assets and income of the company.

If you have a limited company, in addition to your Self Assessment tax return, you must file annual accounts with Companies House and pay Corporation Tax on your profits. Profits from limited companies are subject to UK Corporation Tax, which is currently set at 19%.

Dividends

When a company makes profit, these profits can be reinvested in the company or withdrawn and distributed among shareholders. This distribution is known as “dividends”.

If you run your business as a limited company, the most tax-efficient way to get money out of the company is usually through dividends. Dividend income that falls below your Personal Allowance (the amount you can earn per year without paying tax) is tax exempt.

ROI

Return on investment (ROI) is a performance measurement used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments.

 

Investors can use ROI to value their portfolios and almost any type of expense to determine which investment options are most suitable or attractive. ROI could also take into account how much time and effort has been invested in the business.

Understanding your UK taxes

Tax is levied on the total taxable profits and chargeable gains for each accounting period. A knowledgeable accountant can help you navigate the tax system, determine which taxes apply to you and help you save money.

Basic rate of tax

The basic rate of income tax in the UK is 20%, which is the rate paid on earnings ranging from £12,571 to £50,270.

Personal Allowance

This is the amount you can earn without paying income tax (currently £12,570). You pay tax on any income above this amount at the applicable income tax rate.
The standard percentage of tax that you pay at the basic rate is currently 20%.

 Corporation Tax

Tax paid by UK limited companies and some other organisations. It is based on the annual profits a business makes. Although all profits are taxable, there are allowances to help reduce your tax liability.

From 1 April 2023, the main rate of Corporation Tax will increase from 19% to 25%. The small company rate (19%) will apply to single companies with profits of less than £50,000 and marginal relief will be given for companies with profits between £50,000 (lower limit) and £250,000 (upper limit).

P11D

A statutory form required by and submitted to HMRC yearly and includes items or services such as private healthcare, company cars or season ticket loans.

Self Assessment tax return

A system used by HMRC to collect Income Tax. Individuals including self-employed individuals and directors of limited companies must complete and file a Self Assessment tax return by 31 January following the end of the tax year. If you do not submit your tax return by the due date, then you will automatically be charged a late filing penalty of £100.

Unique Taxpayer Reference

A ten-digit number that assists HMRC in identifying you or your company's tax account and matching your payment to your bill. Every UTR is specific to each UK taxpayer who is required to file a Self Assessment tax return.

National Insurance

National Insurance is a UK government tax administered by HMRC. When you’re self-employed, you’re responsible for paying tax and National Insurance on your income. It’s important to stay on top of all your records to work out how much you need to pay. 

Your NI number makes sure that the contributions and tax you pay are properly recorded on your account. You can apply online for an NI number at any time, and once you receive it, you have it forever. 

Our NI number service takes the stress out of applying for your NI number and makes it as easy as possible.

Value-Added Tax (VAT)

A type of consumption tax levied on the purchase price of goods and services, payable to HMRC. Businesses must register for VAT if their VAT taxable turnover is more than £85,000, but they can also choose to register if their turnover is less than £85,000. 

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Still confused? Our expert advisors offer specialist, personalised, end-to-end accounting and tax advice. Get in contact with them on +44 (0) 20 7759 7530 (Contractor) or +44 (0) 20 7759 7553 (SME) or email contracting@sableinternational.com.

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