Here are some of the terms you will come across while running your business. Having a read through now might make it easier to understand things further down the line.
The period in which certain allowances and tax rates are applicable. In the United Kingdom this period runs from 6th April to 5th April for individuals, and 1st April to 31st March for companies.
This is the period which you choose to prepare your accounts for, and on which your tax is calculated. Many businesses and self employed people chose the same dates as the tax year explained above, but others prefer different dates. This might be because of busy periods, or wanting to get better service out of their accountants when their accountant isn’t as busy.
This is a form of payment from an employer to an employee, which is usually a fixed amount of money or compensation in return for work performed. For example, monthly payments of one-twelfth of the annual salary are quite common to see in many UK based businesses.
This similar to a salary, however the amount of money or compensation tends to be fixed to an hourly rate rather than being fixed annually. For example, an employee may have agreed a rate of £15/hour and so depending on how many hours they work that week or month will result in a varying level of pay from week to week or month to month.
This is a pension scheme that is required to be set up by law for most businesses who employ staff. It requires that the employee make a minimum contribution to their pension over a certain level of earnings per year, as well as the employer.
This is a loan a student took out to finance their studies at University or College. It becomes repayable once that person earns above a certain threshold each year. It is usually calculated by the employer and deducted from the employees salary or wages.
This is a document that an employer gives an employee after a tax year has finished that shows a summary of the employees earnings with that employer for the tax year.
This is a document that an employer gives an employee that leaves the business to perhaps go work for someone else. It shows a summary of the employees earnings with that employer for period they worked for them.
This is the value after you add up all the income of a business and subtract all the expenses. This is known as a net loss if the expenses are more than the income. For example, if you sell £1,000 of goods and they cost you £700 to buy, and £50 to wine and dine your customer to get them buy then the business made £250 of net profit.
This is the profit on which tax is based after non-tax-deductible transactions have been taken off the net profit. For example, if we take the £250 net profit example above, then the taxable profit becomes £300, because HMRC don’t let you count the £50 entertaining costs as an allowance expense.
These are the list of things HMRC would apply to work out if you are trading or are not. They are important because they can help establish a true business that should be paying tax from a hobby that someone does to pass the time. These are:
This is a tax levied directly on the personal income of individuals. At the time of writing this, an English taxpayer might have to pay 20%, 40% or even 45% depending on how much income they had earned in a particular tax year.
This is a fundamental component of the welfare state in the United Kingdom. It acts as a form of social security, since payment of National Insurance contributions establishes entitlement to certain state benefits for workers and their families.
This is where a UK taxpayer who is most likely self employed will need to pay half of their tax liability just before the tax year finishes, and then half again a few months after the tax year finishes. Any shortfall in these payments due to you earning more than expected is made by the following January. A UK taxpayer usually steps into this arrangement if they are expected to owe more than £1,000 of tax.
These are things that a business buys and is expected to keep for at least a year. Examples might be computers, tools, vehicles and machinery. They are not things that are low cost and consumable in nature like perhaps materials purchased by a plumber for fitting on a job.
These are things that a business owes to another business or individual. An example might be a bank loan where a business borrows money that is repaid over a certain amount of time. As long as the there is a loan balance then the business will have a liability.
This is where an individual registers with HMRC as being self employed and trades primarily under their own name. Think of a barber or hairdresser, these are likely to be sole traders who fill in a personal tax return at the end of each tax year.
This is a legal entity in law that has its own rights and responsibilities to the world around it. They tend to have LTD or LIMITED at the end of their name, and in the UK can be found on Companies House.
This is similar to the sole trader, except that there has been agreement set up that allows for recognition that 2 or more sole traders are acting together. These are less common these days as many people would just use a limited company to achieve a similar result, but they are still seen in property lets and long established businesses.
This is like a partnership but a sort of step up. They are registered at Companies House, but don’t pay their own taxes like a limited company. Instead they provide a partnership with a little more protection in case anything were to go wrong.
This is a designated individual or business that is responsible for running the limited company on a day-to-day basis. Think of them as the highest level manager of the business, and if all else fails, where the buck stops for making decisions and getting things done.
This is an individual or business that owns a percentage of a business. For example, a business may have 100 shares in it, of which you own 50. You would therefore be a 50% shareholder, and potentially entitled to 50% of any dividend the business pays.
This is a reference number that helps HMRC identify you from other UK taxpayers. It is often 10 digits long (split into 5 and 5) and usually seen on correspondence HMRC send you.
This is a reference number that helps HMRC identify you from other UK taxpayers. It is often 9 digits long (split into 2 letters, 6 numbers and then 1 letter) and usually seen on some correspondence HMRC send you.
This is the system HMRC use to collect taxes from people as they earn their income. You see this on payslips and it allows HMRC to ensure they don’t have to wait until the end of the tax year before they get taxes from the employed population.
This is the system HMRC use to collect taxes on goods bought and sold. In the UK the main rates of VAT are 0%, 5% and 20% but there are others. At each stage of a good or service being provided, VAT is added to it. If you are VAT registered, you can claim this back on the things you buy. If you are not then you are effectively paying 0%, 5% or 20% more than the goods or services are being offered for.
These are things that are provided to employees, directors and shareholders of a business in place of money. Common examples might be medical insurance, cars or fuel for vehicles. They have to be identified and valued to ensure income tax and national insurance is paid on their value, otherwise everyone would be paid in benefits to avoid paying income tax and national insurance.
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