Welcome to the TWD Accountants Tax Glossary. To help you interpret the jargon that you can come across in dealing with your tax, our team of experts have written a brief explanation for hundreds of technical terms. Click on a letter to show entries.
Abroad (also referred to as overseas):
Any country that is outside of England, Northern Ireland, Scotland and Wales.
A person professionally qualified to prepare a set of business accounts for you. He or she may also prepare a tax return for you.
Accounting and Audit Fees
The amount you pay your accountant for preparing your business accounts are allowable expenses and can be deducted from your taxable profits, meaning you receive tax relief on the amount paid.
The period on which your accounts are based. Usually this includes the twelve months of your Financial Year. The rules concerning your accounting periods during the starting and final years of your business can be complicated.
Is an important term in Capital Gains Tax rules meaning obtaining an item by purchase or other means..
This is the final day in your accounting period - usually the end of your financial year. e.g. accounting period ends 30 June each year - the accounting date is 30 June.
The date can be changed, but there are complicated rules and it is wise to consult an accountant if this is required.
Appeals can be made to an independent appeals tribunal where the individual disagrees with H M Revenue & Customs. The appeals tribunal comprises of a First Tier Tribunal and an Upper Tribunal. If the appeal cannot be settled at the Upper Tribunal it will then go to the Court of Appeal and a further appeal can be made to the Supreme Court.
Accruals Basis of Accounting
A method of accounting which basically includes income earned and expenses incurred during your accounting period, even though you may not have received or paid the cash.
Amounts earned and included in your accounts for which payment has not yet been received.
Individuals are liable to pay tax at the additional rate of 45% where their taxable income exceeds the basic rate band and the higher rate band.
From 6 April 2014 the amount of personal allowance depends on an individuals date of birth. The higher age related allowances have been frozen and eventually there will be just one rate of personal allowance for all taxpayers.
The age related personal allowance is also reduced by £1 for every £2 by which the 'adjusted net income' exceeds the relevant limit. See the Age Related Allowance Calculator
Anti-avoidance rules are included in tax legislation in order to close any loopholes which may be used to avoid paying tax.
Allowances are standard tax-free amounts set by the government every year. They are given to all UK & Commonwealth citizens and others who qualify under specific criteria. The most common is the Personal Allowance. This is given to everyone resident in the United Kingdom for tax purposes, but from 6th April 2010 this allowance has been subject to an income limit of £100,000. Any individual who's income exceeds this amount will have the allowance withdrawn at a rate of £1 for every £2 of income over £100,000.
Approved Mileage Allowance Payments
There are statutory approved mileage rates available if you use your own car for business journeys. Details of the current rates can be found here
If your employer pays a mileage rate below the statutory rates, you can claim for the difference.
You are only taxable on any amount paid in excess of the approved rates.
Adjusted Net Income
This is the income left over after deducting any allowable reliefs, gross charitable donations and pension contributions, but before deducting personal and blind person's allowance.
Business assets depreciate in value, and the cost can be claimed as an expense. This is known as a capital allowance. Over the life span of the asset, the amount claimed should cover the depreciation.
When an asset is sold though, the actual depreciation may be more than capital allowances claimed already. If so, a balancing allowance can be claimed. This will be equal to the actual depreciation less capital allowances already given.
Business assets depreciate in value, and the cost can be claimed as an expense. This is known as a capital allowance. Over the life span of the asset, the amount claimed should cover the depreciation.
When an asset is sold though, the actual depreciation may be less than capital allowances claimed already, and thus, effectively excessive expenses have been claimed. In this case, a balancing charge will be shown in the accounts. This will be equal to the capital allowances already given, less actual depreciation.
Money owed that has not been paid to you after a period of time is commonly known as a bad debt.
This is where an asset is held in Trust by someone other than the owner. Any income still remains taxable on the actual owner.
The standard rate of interest, set monthly by the Bank of England.
It is the basis of the official interest rate for a tax year. This is used when calculating taxable benefit on low interest loans from an employer.
Basic Rate Tax
The standard percentage of tax that you pay, is currently 20%. This means you pay 20p for every £1 taxable at the basic rate.
The current rate bands are shown here and detail the rates of tax paid in excess of the basic rate band.
Basis of Accounting - Accruals
A method of accounting which basically includes income earned and expenses incurred during your accounting period, even though you may not have received or paid the cash.
Basis of Accounting - Cash
A method of accounting where only the income actually received is shown. For example, accounts are prepared to 5 April. Income from work done before that date but received afterwards would not be shown until the next set of accounts.
This is the period for which your profits are taxable. Usually, this is the same as the accounting period, because you are taxed on the profit shown on your accounts.
Special rules apply in
the first three years of business,
when you finish business, or
if you change your accounting date.
These rules mean the profit on which you are taxed is not always calculated from one set of accounts, and the basis period can be different than the accounting period.
This is the person who benefits from something. The term is most commonly used for someone who receives income from a Trust or from the Estate of a deceased person.
Benefits (from employment)
When your employer gives you something other than salary, it is often deemed to be a taxable benefit. Common examples include company cars, medical insurance, accommodation etc. Where this happens your employer will provide you with a form P11d at the end of each tax year reporting the taxable benefit provided for the year. This information is also provided to H M Revenue & Customs and needs to be included on any self assessment tax return.
Blind Person's Allowance
This allowance is available if you are registered blind. The only requirement for a claim is that you are registered blind with your local authority. The exception is for residents of Scotland and Northern Ireland, where this is not possible. In this case, just tell your tax office accordingly.
This is where extra shares are given at no cost to existing shareholders.
Sometimes the cost of books used for work can be claimed against taxable income. In all cases, it must be proved that the books were solely for your business. Employees must also prove that the job could not be done without the books, which is often difficult to do.
H M Revenue & Customs publishes a list of allowable professional journals. If a journal is on the list, the cost is allowable.
Effectively, any time trade is carried out with the intention of making a profit, it constitutes a business.
In grey areas where profit are made from what could be considered to be a hobby, each case must be looked at individually.
Many, but not all, outgoings of a business can be set against total income when arriving at taxable profits.
Any form of income received by the business may be taxable.
This usually comes in the form of sales or fees etc, but also includes all other sources of income, such as investments or capital gains.
Loan granted to employees at a low rate of interest may give rise to a taxable benefit. These are know as beneficial loans.
Not all employer loans are taxable. If the total of all loans that would not qualify for tax relief elsewhere is below £10000 at any time in the tax year, there will be no charge. (£5000 before 6 April 2014)
If chargeable, tax is due on the difference between the interest paid and the interest payable at a standard rate.
As a final point, if loan qualifies for tax relief on the interest paid, relief may also be due on the taxable element (see Deemed Interest).
Business Property Relief
A potential relief available against Inheritance Tax when ownership of a business property is transferred by way of a gift. The property must have been owned for at least two years. The amount of relief depends on the type of business property owned. Relief due is:
Business or interest in a business - up to 100%
Unquoted shares in a trading company - up to 100%
Unquoted securities in a company together with any unquoted shares, which gave the holder control of the company - up to 100%
Shares in a quoted company which the donor had control of before the gift - up to 50%
Asset of a quoted company which the donor had control of before the gift - up to 50%
When an asset is used for business purposes, the purchase cost is not normally allowable as an expense. This is because the asset still has a value after it has been used. However, the value of the asset will decrease over time. An allowance to reflect this depreciation can be claimed instead. This is known as a capital allowance.
Capital Gains Tax
If you own a chargeable asset that has gone up in value which you sell for a profit, you may need to pay Capital Gains Tax (CGT). On its most simple level, CGT is the tax payable on the increase in value of an asset over the period it is owned.
The first £11,600 of the gain is covered by the annual exemption and is not taxable. Any amount above that is charged at 18% where this falls within the individuals unused basic rate band and then charged at 28% thereafter.
Capital Gains - costs
Costs taken into account when calculating CGT include :
Acquisition and disposal costs: The associated costs of buying and selling the asset (e.g.broker's fees for shares).
Enhancement costs: Any amounts spent on improving the asset.
When an asset is sold for less than the acquisition cost, a capital loss has arisen. This loss can be set against any capital gains arising in the same year or can be carried forward to set against future capital gains. In some cases, though not commonly, it can be set against other income in the same year.
Certificate of Tax Deposit
It is possible to pay a large tax bill in advance by purchasing Certificates of Tax Deposit from H M Revenue & Customs. The initial deposit is £500 with minimum additions of £250.
They can be used to pay any tax with the exception of PAYE, VAT, tax deducted from payments to contractors and corporation tax.
Capital gains tax only applies if the item sold is a chargeable asset. All forms of property are chargeable unless they are specifically exempt.
The most commonly sold chargeable assets are:
second homes, and
personal assets worth more than £6000
Non-chargeable assets include:
your main home
your own car
investments held in ISA's, and
personal assets worth less than £6000
Chargeable Event Gains
This has nothing to do with capital gains.
A chargeable event happens when money or other benefits are paid out from a life insurance policy, and the payment is deemed as a chargeable event. The rules are complex, but the insurance company should advise if a chargeable event has arisen, and how much the taxable element is.
A tax credit is given on the chargeable event, and only those liable to higher rate tax on their total income will pay additional tax. The amount must be shown on your self assessment tax return.
There are a number of classes of company.
To be a close company, it must be controlled by no more than 5 shareholders. This covers most private companies in the UK. The term applies in such areas as capital gains and when claiming tax relief on a loan to buy shares in the company.
When your employer provides you with a car that you can use for your own private use, a taxable benefit arises. Special rules are used to work out the amount of the benefit, see the car benefit calculator.
Every day travel to work is not usually allowable for tax purposes.
Exceptions may apply when a workplace is temporarily moved, or where a person works from home and travels to various customers.
Capital Gains - declaration
A Capital Gains tax declaration is only obligatory where there is a chargeable gain of more than the annual exempt amount.
For individuals, personal representatives and trusts for the mentally disabled the current exempt amount is £10,600 (2011/12 = £10,600).
For General Trusts the current annual exemption is £5,300 (2011/12 = £5,300)
Charitable Gifts Relief
Tax relief at the payers top tax rate is available for charitable donations under the gift aid scheme. To qualify for the relief donors are required to make a declaration. Donations are treated as being net of basic rate tax, but in order to retain the tax relief, donors must be liable to pay an equivelent amount of income tax. A taxpayer may claim to have the donation treated as if it had been made in the previous tax year and to do this a claim must be made no later than the date the tax return for the previous year is filed BUT filed no later than 31 Jan.
A party to a formal civil partnership.
A formal partnership between same sex couples. A civil partnership is treated in the same way as a marriage for all tax purposes.
People who owe you money are termed "debtors". When accounts are prepared, even if payments are outstanding from debtors, the details will still be shown.
Deferment - National Insurance
If you are both self employed and employed you will be liable to pay Class 1, 2 & 4 national insurance contributions. However there is a maximum figure above which contributions will be refunded.
If the contributions for the year are expected to exceed the maximum, you can apply to defer payment of contributions. You should seek advice from H M Revenue & Customs or your tax advisor to calculate whether you are eligible.
Deficiency Relief - Life Insurance policies
During the term of a Life Insurance Policy, it is possible to receive taxable income from it.
Any payout on termination of the policy should be more than paid in. If this amount is less than the amounts on which tax has already been paid, it follows that too much tax was paid. (ie tax has been paid on more income than has been received.) Corresponding deficiency relief can be claimed in these cases.
Meaning a lower limit before something takes effect.
For example, a de minimis of £10,000 applies to certain low interest loans made by employers. If the total of these loans to an individual is below this de minimis limit, there is no taxable benefit.
Department for work and pensions
This is a Government department dealing with state benefits and pensions.
An asset used in a business on an ongoing basis retains a residual value. However, this value will reduce over the lifespan of the asset. This reduction in value is the depreciation and can be claimed as a deduction from business profits.
Depreciation is claimed in accounts as Capital Allowances.
For tax purposes, directors` income is treated in the same way as other employees, although there are differences in the way National Insurance and company benefits are dealt with.
The accounts of a business come in two forms - business accounts and accounts for tax purposes.
In the former, all income and expenses will be shown, to reflect the exact financial situation. These accounts are prepared first and then used as the basis of the calculation of your profits for tax purposes.
In the latter, some expenses will then be disallowed as they do not qualify for tax relief. When the tax accounts are prepared, these disallowable expenses are added back on to net profits to find the net taxable profits.
Special rules apply to all securities issued at a discount to private investors. Securities are discounted where their issue price is lower than the redemption price by more than 0.5% per year between the issue and redemption. If the peiod exceeds 30 years then its by more than 15%.
These provisions do not cover shares, gilt edged securities , indexed securities linked to the value of a share index, life assurance policies and capital redemption policies.
There is no capital gains tax charge but instead a charge to income tax arises in the tax year of disposal or redemption on the profit made.
A Trust where the Trustees have discretionary power over the distribution of income and assets and no-one has a specific right to them.
All payments to employees are taxable - including business expenses. Strictly an employer should advise H M Revenue & Customs, followed by a separate claim by the individual for tax relief. A dispensation removes the requirement to do this.
An employer reaches an agreement with the Tax Office that only valid business expenses will will be reimbursed to the employee and no report or claim is necessary.
This refers to the sale, loss, gift, theft or swap of an asset.
This is a term used for the money paid out on investments such as shares, unit trusts etc.
UK and foreign dividends form the top slice of taxable income. Where the income does not exceed the basic rate band the notional tax credit is 10%. However, if you are liable to tax at the higher rate an additional charge of 22.5% of the gross dividend is due. Or if you are liable to tax at the additional rate an additional charge of 27.5% of the gross dividend is due.
Dividends - Stock or Scrip Dividends
Where shares are offered as an alternative to a cash dividend, it is known as a stock or scrip dividend.
Broadly speaking you are domiciled in the country considered to be your permanent home. It is distinct from nationality or residence and you can only have one domicile at any given time.
Domicile of Origin - inherited from father
Domicile of Choice - can change domicile of origin by behaviour. Factors for deciding domicile of choice are, burial arrangements, location of assets, membership of clubs, visits or links with a country
Domicile of Dependency - follows that of the person on whom you are legally dependent.
Where the same income is liable to be taxed in both the UK and another country, relief may be available under the specific terms of a double tax agreement between the UK and that other country. This ensures the income is only taxed once.
It is possible to be resident in more than one country at a time for tax purposes. The term for this is dual residence. This does not necessarily mean that tax is paid twice as Double Taxation rules may apply.
This relief may be due on gains made by individuals on the disposal of:
All or part of a trading business they carry on alone or in partnership;
Assets of the individuals or partnerships trading business after it ceases;
Shares in (and securites of) their personal trading company (or holding company of a trading group);
Assets owned by them and used by their personal trading company (or group) or partnership
For gains arising from disposals made on or after 6 April 2011 the first £10 million of gains qualifying for relief will be taxed at 10%.
Expenses - Employment
Expenses must be wholly, exclusively and necessarily incurred in the performance of the duties of your employment, to qualify for tax relief.
This is monies received in relation to your work and can be received from employment, directorship or self employment.
Enterprise Investment Scheme
This scheme was introduced to encourage individuals to invest in small higher risk trading companies. The scheme provides income tax relief to external investors in qualifying unquoted companies, and capital gains tax exemption on disposal of shares.
In some cases, individuals have a choice as to how their tax affairs are arranged. In these situations, an election must be made before the change can be applied.
There are many such elections, each with its own rules, and usually strict time limits.
'Emoluments' include all salaries, fees, wages, perquisites, including benefits in kind and profits whatsoever.
An employee is an individual who works under the control of and as part of the business of another, engaged under a contract which is a 'contract of service'.
Business entertainment means the provision of free or subsidised hospitality or entertainment. The person being entertained may be a customer, a potential customer or any other person.
Rules specify whether the amount is shown in the company accounts or on an employee's P11D as a taxable amount.
H M Revenue & Customs can make enquiries into your self assessment tax return for a period of up to 12 months from the date they receive the return. However, if the return is filed late or amended this period is extended to the quarter date following the 12 month anniversary of the date they received the late return or amendment.
Quarter Dates: 31 Jan, 30 April, 31 July or 31 Oct.
The enquiry can be to clarify any entry made on the return. If you are at all unsure, you should seek further professional advice.
`Estate` is a person's total possessions. It includes goods, money and property of every kind. In particular, `estate` refers to the possessions that a deceased person leaves.
The term 'ex-gratia' is used in relation to a payment the employer makes to an employee when under no legal or contractual obligation to do so.
Some types of income are exempt from UK tax. Examples include income from an ISA, premium bond prizes, some social security benefits, damages for personal injury.
European Union - EU
The European Union is an economic and political union of 28 countries. Countries in the EU are:
Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the UK
European Economic Area - EEA
The European Economic Area (EEA) includes EU countries and also Iceland, Liechtenstein and Norway. It allows them to be part of the EU’s single market
Enterprise Management Incentives
Small higher risk companies may offer their employees enterprise management share options, subject to a limit. Providing scheme rules are complied with, there will normally be no income tax or employers and employees NIC to pay and when an employee sells shares acquired under the scheme.
Capital Gains Tax taper relief will date from the time the option was granted rather than the date it was exercised. There is no requirement for the scheme to be registered, but notice must be given when options are granted.
Flat Rate Expenses
Deductions are allowed for tools, special clothing etc necessarily provided by an employee without reimbursement and which the employer does not make available. The allowance you can claim is an agreed amount depending on which industry your occcupation falls within.
A person resident in the UK is generally chargeable to UK tax on worldwide income. However, there are exceptions and reliefs depending upon:-
The type of income
The residence status
The domicile status of the individual and paying body.
You should seek professional advice if you are unsure
Foreign Earnings Deduction
Where the duties of a 'seafarer' resident and ordinarily resident in the UK are performed wholly or partly outside the UK, a deduction may be allowed from taxable earnings.
Furnished Holiday Lettings
The rules apply to qualifying properties situated within the UK and qualifying properties in the EEA
To be regarded as a furnished holiday letting the property must be furnished and the letting must meet all three of the following qualifying tests:
Available for holiday letting to the public on a commercial basis for 210 days or more; and
let commercially for 105 days or more; and
let for periods of longer term occupation (more than 31 consecutive days) for not more than 155 days during the year
From April 2012 loss relief against general income and terminal loss relief cannot be claimed for income tax purposes. The loss can only be set against income from the same UK or EEA furnished holiday lettings business.
Payments made by an employee to a private scheme separate to a company scheme. They are also commonly known as FSAVCs. The rules regarding maximum contributions are slightly different to those for standard personal pension schemes.
Income tax is due on rents received in respect of furnished residential lettings. A furnished property is one which is capable of normal occupation without the tenant having to provide their own beds, tables, sofas and other furnishings, cooker etc. The provison of nominal furnishings will not meet this requirement.
A wear and tear allowance of 10% of the 'net rent' may be claimed to cover depreciation of furniture, fridges etc supplied with the accommodation.
Filing By Internet. Refers to filing tax returns of any type on-line.
The Gift Aid scheme covers both single donations and a series of donations including covenanted payments to charitable organisations. There is no minimum limit for gift aid payments. See Charitable Gifts Relief.
A 'Golden Handcuff' also known as a 'Golden Hello' is a term used for a lump sum payment received on taking up an employment.
This is the term used for a lump sum payment received when you leave an employment. The important factor in determining whether it is taxable as employment income, is if it is a payment for services or because the job no longer exists.
The higher rate of tax is applicable when the individuals income exceeds the personal allowance and basic rate of tax.
The current rate bands are shown here and detail the rates of tax paid in excess of the basic rate band.
Tax relief is available to cover reasonable additional household expenses where the duties carried out at home are central duties of the employment and it is a requirement of the duties that the work is carried out at home and nowhere else.
Payments made to an employee by the employer, for carrying out duties of employment at home, are exempt from income tax . Up to £4 pw can be paid without the need to provide supporting evidence of the expenses incurred. For larger payments the employer must provide evidence that the payment qualifies.
If the employer does not make any payment, the employee may still be able to make a claim for homeworking expenses direct to HM Revenue & Customs. However they must satisfy the following 4 conditions:
The duties performed at home are substantive duties of the employment
Those duties cannot be performed without the use of appropriate facilities
Either no such facilities are available to the employee on the employers premises or the nature of the job requires the employee to live too far away for daily commuting
At no time is the employee able to choose between working at the employers premises or elsewhere.
See Furnished Holiday Lettings
IR35 - personal service companies
There are special rules known as IR35 which prevent the avoidance of tax and national insurance by operating through a personal service company rather than being employed directly. There are strict guidelines as to whether these rules apply and you should always seek professional advice.
ISA - Individual Savings Account
ISA's are tax free savings investments and are available to individuals aged 18 years and over who are resident and ordinarily resident in the UK.
From 1 July 2014 all ISA's became 'New ISAs' (NISAs) which are more generous and simpler.
Cash ISAs / NISAs are available to to those aged 16 years or over.
On certain lifetime gifts, including transfers into and out of trust ; and
On death on the value of an individuals estate as well as on certain gifts made during the last 7 years of the deceased's lifetime.
Investment income is defined as:
Any interest received on savings
Any dividends and the accompanying tax credit received on shares held in UK companies;
Any discounts on or income from securities; and
Gains from life insurance policies etc., which are chargeable to income tax.
Where a business is transferred to a company as a going concern together with the whole of the assets of the business and the transfer is made wholly or partly in exchange for shares issued by the new company.
Job Related Accommodation
The provision of accomodation to a person by reason of employment, results in a charge to tax on the benefit received. There are exceptions on which no tax is charged and these are when it is:
the accomodation is provided in the normal course of his domestic, family or personal relationships; or
It is provided by a local authority under its usual terms for non employees; or
the employee is a representative occupier, for example, a caretaker; or
It is customary for employees (e.g. police officers, clergymen) to be provided with living accomodation for the better performance of their suties; or
Part of a special security arrangement.
A Joint Tenancy agreement is when all the joint owners have equal interests in the property. The interest or share of each owner passes on their death by survivorship to the remaining owner(s), in equal shares. Each owner can break up the joint tenancy and in doing so the owners then hold the joint asset as tenants in common.
If a tax code contains the letter "K", it signifies that the deductions in the code are more than the allowances.
see Trading losses
See Qualifying Loans
See rental income, furnished holiday lettings and furnished lettings
Managed Service Companies
These are companies through which individuals provide their services to clients. These are not the same as Personal Service companies (see IR35). It is likely that the individual will be an employee of the MSC and will not be a shareholder, director or in business. Also the individual will not exercise control over the MSC.
Married Couple`s Allowance
Since 6th April 2000 this allowance is only available if either spouse was born before 6 April 1935. Also see Age Related Allowance
This new allowance is available from April 2015 and could save married couples up to £212 per tax year
If you are a basic rate taxpayer and your partner’s total income from all sources, pensions, earnings and savings is less than £10600, they can transfer up to £1060 of their unused personal allowance to you.
As long as you meet the earnings rule above, are married or in a civil partnership and were both born after 6/4/1935, you will qualify. If you or your partner were born before 6/4/1935 you will be entitled to the Married Couple’s Allowance instead.
See Approved Mileage Allowance Payments
The National Minimum wage is the amount a worker is entitled to be paid by law depending on their age and whether they are an apprentice.
The rates are usually reviewed annually and details of the current rates can be found here
New Money Laundering Regulations apply to most businesses in the financial sector and came into force on 1 March 2004.
By law these businesses are now required to establish the identity and address of any new clients
Gross rents received less payments for charges and services that would normally be borne by the tenant, but are, in fact, borne by you (for example, council tax, water and sewerage rates etc).
New ISAs (NISAs)
These were introduced from 1 July 2014 when all ISA's became 'New ISAs' (NISAs)
Details about the subscription rules from 1 July 2014 can be found here
National Insurance - Class 1A
These contributions are paid annually by employers on taxable benefits provided to employees that are not chargeable to Class 1 or Class 1B.
National Insurance - Class 1B
These are payable by employers who enter into a PAYE Settlement Agreement with H M Revenue & Customs.
National Insurance - Class 1
Employees and their employers pay Class 1 contributions. The contributions are based on a percentage of earnings. Payments made by employees are 'Primary' contributions and those by employers are 'Secondary' contributions. Primary contributions are not payable if the employee is under 16 years or over pension age.
National Insurance - Class 2
This is paid by individuals who are self employed and is a fixed amount per week paid direct to the National Insurance Contributions Office. There is a small earnings exception where if profits are below a set limit an individual is excepted from making payments.
Contributions are not payable if under 16 years or over pension age at the beginning of the tax year.
National Insurance - Class 3
These are voluntary contributions and are paid by those who would otherwise not pay enough contributions to earn a full pension.
National Insurance - Class 4
These are paid by an individual who is self employed and are based on a percentage of profits above a fixed lower limit. These are payable to H M Revenue & Customs under self assessment. These are not payable if under 16 years or over pension age at the beginning of the tax year.
Net Relevant Earnings
Net Relevant Earnings (or NRE) are the total taxable earnings from all sources, including self employed income, but excluding any income from a job which has a company pension scheme.
NRE is used when calculating the maximum that can be paid into a personal pension scheme. These are limited to a certain percentage of your net relevant earnings.
These tests are used to determine your statutory residence status in the UK.
If you meet any of the automatic overseas test for a tax year you are automatically regarded as non-resident for that year.
HMRC guidance regarding these tests can be found here
An occupational or company pension is established by an employer to provide pension benefits to individuals in respect of their service as employees.
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.
A individual can claim overpayment relief to reclaim income & capital gains tax as well as class 4 NIC, or to reduce an excessive assessment. The claim must be made within 4 years following the end of the tax year to which the return relates.
Claims must state the amount that the individual believes they have overpaid and that they are making a claim for overpayment relief under Schedule 1AB TMA 1970. It should also show, the tax year, the grounds for the claim, whether there has already been an appeal for the year in question and, if required, documentary evidence of the claim. The claim should also be signed by the claimant.
Where HM Revenue & Customs (HMRC) should have already collected the tax due because the information had already been provided to them and they have failed or delayed to use this information, then in some limited circumstances HMRC may agree not to collect it. This is under the specific concession of ESC A19.
This will only apply if the individual could reasonably have believed that their affairs were in order.
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.
Company benefits are not taxable if the employee is paid at a rate of less than £8500 per year. This limit includes the salary plus the value of the benefit provided. In these cases, the employer advises the revenue of any benefits provided on a form P9D.
Forms P11D show the cash equivalent of taxable benefits provided to employees earning £8,500 per annum or more and directors. This limit includes the salary plus the value of the benefit provided. They are completed by the Employer and copies must be provided to both H M Revenue & Customs and the employee by 6 July after the end of the tax year.
When you leave a job, your employer will provide you with a form P45. This shows taxable pay and tax paid up to the leaving date. It comes in four parts,
Part 1 - Sent by the employer to their tax office.
Part 1A - For you to keep
Parts 2 & 3 - To be given to any new employer to ensure correct tax continues to be deducted.
Employers are required to provide this form to all employees by 19th May after the end of the tax year.
The form details taxable pay and tax deducted together with the tax code operated up to the year ended 5th April. In addition details of national insurance contributions paid and any student loan deductions are also shown.
PAYE is an abbreviation of Pay As You Earn.
Your employer is responsible for deducting tax and national insurance from your salary and paying this over to H M Revenue & Customs.
Payment on Account
Under Self Assessment you are required to make payments on account where your tax liability exceeds £1000 or less than 80% of the tax liability is collected at source.
Personal Pension Relief
Payments are normally paid net of basic rate tax. Where the individual is liable to higher rate or additional rate tax then personal pension relief can be claimed directly from H M Revenue & Customs. For self assessment individuals this is done annually via the self assessment tax return, for others a claim must be made separately.
The personal allowance is deducted from net income and saves tax at the highest rate. However, the relief is reduced by £1 for every £2 of income over £100,000. This means the allowance is withdrawn completely once income exceeds the limit for the year. See the personal allowance calculator.
Potentially Exempt Transfer
These are any transfer of value by an individual to:
An Accumulation and Maintenance trust;
A trust for the disabled;
A trust creating an interest in possession
They are exempt when made and remain so unless the transferor dies within 7 years of the date of the gift.
Subscriptions paid to professional bodies are often allowed as business expenses. H M Revenue & Customs publishes a list of professional bodies to whom subscriptions qualify for tax relief.
H M Revenue & Customs are able to impose penalties where it has been established that tax has been lost through fraudulent or negligent conduct. Some penalties are for fixed amounts and others are based on the amount of tax lost. H M Revenue & Customs do however, have the ability to reduce the amount dependant upon the individual circumstances
Pay in Lieu
A payment in lieu is used to describe a range of payments made under various situations. How the payment is taxed depends on whether its is contractual, customary or a payment of damages.
Some types of loan qualify for tax relief on the interest paid, these are:
Loans to purchase plant or machinery used for an employment or trade.
Loans to buy shares in a close company. If you own 5% or more or are a full time working officer or employee (subject to additional conditions)
Loans to purchase land and buildings for use in business.
Loans to buy an interest in a partnership.
Loans to buy a life annuity if aged 65 or over at the time of purchase.
Loans taken out by a Personal Representative to pay Inheritance tax.
Loans taken out for acquiring shares in a 'co-operative' and/or for lending money to a co-operative, and/or to repay a loan used for any one or more of these purposes.
Income from UK land and property which is taxable as investment income, except for Furnished Holiday Lettings which is treated as trading income.
Payments made to an individual who has been continuously employed for 2 years or more and their employment has been terminated as the job no longer exists. These can include pay in lieu and golden handshakes. The amounts are chargeable to income tax above the statutory limit of £30,000. Only one limit applies per annum.
The treatment of overseas tax affairs for individuals is complex and professional advice should be sought for those who are eligible for the 'remittance basis' of taxation for foreign income and gains.
If an individual is resident in the UK but not domiciled here then income and gains arising abroad may be taxed on the remittance basis rather than the arising basis. In other words the income or gains will be charged to UK tax if and when they are remitted to the UK.
If a claim for the remittance basis is made, a 'remittance basis charge' will need to be paid and this depends on how long the claimant has been resident in the UK.
£30,000 if the claimant has been UK resident in at least 7 of the previous 9 years.
£50,000 if the claimant has been UK resident in at least 12 of the previous 14 years.
There are also other implications of claiming remittance basis affecting personal allowances.
Rent A Room Scheme
Rents received from letting furnished accommodation in your only or main residence are exempt from tax subject to a maximum limit of £4250 per year. If rents received exceed this amount tax is paid on:
Gross rents less expenses; OR
The amount by which the rents exceed the maximum, without deducting expenses
If the income is received jointly, the exemption is split.
Rental expenses fall into two categories.
Revenue expenses:Ongoing expenses incurred in the rental of a property are deducted from the annual rental income to arrive at the profit. They may include letting agents' fees, house insurance etc.
Capital Expenses:These are expenses on the fabric of the property. For instance, an extension to a house, or new wiring etc. increasing the value of the property. Such expenses can only be claimed against any future capital gains tax.
Retirement Annuity Payments
Retirement Annuity Schemes are a type of personal pension scheme that was phased out in July 1988. Since then, no new contracts have been created, although contributions to existing agreements have still been possible.
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.
Statutory Residence Test
You will be regarded as resident in the UK if you do not meet any of the overseas test and you meet one of the automatic UK tests or the sufficient ties test.
If you spent 183 days in the UK you are still likely to be regarded as resident in the UK. If not, there are various steps to take to ascertain your residence status under the new rules.
This is investment income and liable to income tax. Generally, tax is deducted at source at a rate of 20%. From 6 April 2008 there is a 10% starting rate for "savings income" that you may be entitled to. The rate at which your saving income is taxable is dependant on your total income.
If your total income, including your savings income is less than your personal allowances then you will not be liable to pay any tax and you should advise the bank or building society that tax should not be deducted.
If your total income, excluding your savings is less than your personal allowance plus the lower rate limit, then some or all of your savings income will be liable to tax at only 10%.
If your total income, including your savings is less than the personal allowance plus the basic rate limit, then your savings will be liable to tax at 20% which is covered by the tax deducted at source in most cases.
if your total income, including savings income,exceeds your personal allowance plus the basic rate limit, some or all of your savings income will be liable to tax at 40%,
if your total income, including savings income,exceeds your personal allowance plus the higher rate limit, some of all of your savings income will be liable to tax at 50%
Where tax remains unpaid more than 28 days after the due date, you will be liable to a surcharge of 5% of the unpaid tax. An additional 5% will be levied on any amount still unpaid more than 6 months after the due date. Interest also accrues on a daily basis.
For seafarers who: -
Are resident and ordinarily resident in the UK (or from 6 April are residents of the EU and EEA) AND
Perform duties wholly or partly outside the UK
A 100% deduction may be allowed from taxable earnings.
Sufficient Ties test
If you do not meet any of the automatic overseas tests or the automatic UK tests then the Sufficient ties test will be used to determine your residence status for a tax year. You will need to consider your connections to the UK to determine whether, when taken into account with the number of days spent in the UK, you would be regarded as resident in the UK for a particular tax year.
Means using the tax rules to your best advantage. If you have used a scheme or arrangement to obtain a tax advantage you are required to disclose the details to H M Revenue & Customs. Failure to do so will result in penalties.
There are various ways to claim for losses by a sole trader or a partnership. They can be relieved as follows:
Carry forward against later profits of the same trade
Set against general income of tax year of loss and/or the previous tax year. The claim for either year may, if the individual wishes, be extended to include set off against capital gains.
In a new trade, carry back against general income of the previous three tax years, earliest first
On cessation of a trade, set against trading income of the final tax year, then carry back against trading income of the previous three tax years, latest first.
Tenancy in Common
A tenancy in common is where:
The owners can have unequal interests in the property
The interest of any owner passes on death under their will or, if there is no will, under the rules of intestacy
The share of a tenant in common is usually in proportion to the money they put in to buy the joint property
Deliberately falsifying the nature of transactions, etc. In such cases you may face criminal prosecution as well as being required to pay the tax lost plus interest and penalties.
UTR - Unique Tax Reference
This is a unique 10 digit reference number allocated to individuals falling within the self assessment system.
This is the amount of any tax calculated to be due at the end of the tax year.
When determining your residence status under the newStatutory Residence rules, if you do not meet any of the automatic overseas tests then HMRC will review whether you are resident in the UK by meeting one of the automatic UK Tests.
There are three automatic UK tests. HMRC guidance notes can be found here
Meaning Value Added Tax, it is charged on the supply of goods and services made in the course of a business by a taxable person. The legislation is quite complex and you should always seek professional advice.
Wear & Tear Allowance
A deduction of 10% of the 'net rents' from the furnished lettings to cover depreciation of furniture, fridges etc. supplied with the accommodation.
If the accommodation isn't furnished, or only partly furnished, the 10% wear & tear allowance isn't due.
The Wear and Tear allowance is abolished from April 2016 and replaced with a new relief based on actual costs of replacing furnishings.
Year of Assessment
The year of assessment runs from the 6th April to 5th April next.
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Based in Stockport, near Manchester, we represent the friendly face of tax. Over the last 20 years, we have grown to become one of the UK`s leading independent tax and accountancy specialists.
Address: Mellor House, 65-81 St Petersgate, Stockport, SK1 1DS.