Busting tax and accountancy jargon

Tax jargon explained

If you’re looking to understand tax jargon in simple terms, you’ve come to the right place.

We’ve fished out the tax accounting terminology you’re most likely to come across as a tradesperson and have ironed out the meaning of this baffling tax jargon once and for all.

Once you get your head around tax accounting terminology, you’ll not only find the accountancy side of your trades business less stressful, but you’ll be in a better position to understand how to legally pay less tax too.

Accounting jargon made simple

Some of the basic accounting terminology and definitions you’re likely to come across as a tradesperson in the UK include:

Allowance – This is the amount you can earn before you start paying tax. The tax-free personal allowance for 2022/23 is £12,570. I.e. you pay tax on earnings over £12,570.

Assets – Anything your business owns that adds value to your accounts. This could be property, goods, or items. You will pay Capital Gains Tax when these items are sold.

Bookkeeping – Bookkeeping is the process of keeping a record of all the financial transactions of your business.

Capital Gains Tax – This is the tax charged on the money you make from selling an asset.

Corporation Tax – The tax that all UK limited companies must pay on their profits.

Construction Industry Scheme (CIS) – CIS is a tax scheme that makes sure the right amount of tax is paid to HMRC from a subcontractor’s wages.

Deductions – These are business-related expenses that can be taken off your total income, therefore reducing the tax bill.

Dividend – Dividends are a way for a limited company to distribute profits to its shareholders.

Income Tax – The tax paid on any income that exceeds your personal tax-free allowance.

IR35 – IR35 refers to a piece of tax legislation designed to stop contractors from avoiding tax.

PAYE – PAYE stands for Pay As You Earn. PAYE allows HMRC to make the relevant deductions from your employees before you pay them. The deductions can include Income Tax, National Insurance Contributions, Construction Industry Scheme deductions, and Student Loan payments.

Making Tax Digital – A scheme set up by HMRC to have a completely digitalised tax system, aiming to make the process more streamlined.

National Insurance (NI) contributions – This is a tax on earnings that contributes towards certain government benefits, including your basic state pension. There are different classes of contributions depending on your employment status (e.g. sole trader or a limited company), and how much you earn. Visit gov.uk for a breakdown of NIC rates.

Self-assessment – If you are self-employed you will need to submit a self-assessment form to calculate your earnings and the amount of tax you must pay to HMRC.

Tax rates – This determines how much income tax you pay on earnings above your personal tax-free allowance.  The tax rates are in bands: Basic rate (income between £12,571 to £50,270) is taxed at 20%, Higher rate (income between £50,271 to £150,000) is taxed at 40%, and Additional rate (income over £150,000) is taxed at 45%. Check out this post for an example of what this looks like in practice.

Tax year – The tax year is from 6th April through to the 5th April the following year. For example, the tax year 2022/23 is the period from 6th April 2022 to 5th April 2023.

VAT – VAT stands for Value Added Tax. It’s applied to most products and services sold in the UK. If your business has an annual turnover (sales) of £85k or more, you’ll need to register for VAT.

Quick summary

• Keep a record of your allowable expenses to help reduce your tax bill.
• Pay your tax bill on time to avoid charges.
• Scroll up for list of helpful definitions for some of the accounting jargon examples you’re likely to come across as a tradesperson in the UK.
• If in doubt, or you just don’t have the time, hire an accountant to help with your tax and accountancy needs.

Did you know we have a money advice section on our blog, covering everything you need to know about tax, VAT, cash flow, allowable expenses, money-saving tips, and more?