Tax Glossary
We have tried to outline all the relevant terms below associated with accountancy, accounting, payroll and tax.
Occupational
Pension: This is the pension paid to as a result of being in a company pension
scheme. It is taxed through PAYE, in the same way as salary. Usually
allowances are set against pension income.
Other Income:
If income is received that does not have its own section on the Tax Return
it is known as other income.
Overlap Period:
In most cases, accounts are prepared up to a certain date. Tax is then paid
on the bottom line amount.
However, when a business starts or an
accounting period changes, complex rules apply. The same accounting period
may become taxable in two different tax years. Effectively, tax is paid on
the same income twice. That period is called the Overlap Period.
Overlap Relief can be claimed to prevent
income being taxed twice.
Overlap Profit:
In most cases, accounts are prepared up to a certain date. Tax is then paid
on the bottom line amount.
However, when a business starts or an
accounting period changes, complex rules apply. The same accounting period
may become taxable in two different tax years. Effectively, tax is paid on
the same income twice. That profit taxed twice is called the Overlap Profit.
Overlap Relief can be claimed to prevent
income being taxed twice.
Overlap Relief:
Overlap Relief can be claimed to balance out overlap profits.
The relief will be the same amount as
the overlap profit already taxed, and will be set against profits in a later
tax year. Thus the profits of that year are reduced by an amount equal to
the profit taxed twice.
This does not usually happen until the
business ceases, but can also happen when an accounting period is extended.
P11D:
An employer that provides taxable company benefits has a duty to work out
the taxable benefit, and advise the employee and the revenue of the amounts.
This is done on a form P11D.
It shows the cash equivalent, or taxable
value, of any taxable benefits. This has to be done before 6 June every
year.
P2:
Everyone who is employed or receiving an occupational pension has a tax code
worked out by their tax office. If this is not standard a tax code is sent.
This form is called a P2, or variant.
The form shows the allowances and
deductions used in calculating the code, and perhaps some further comments.
Most people have a standard code, and
are never sent a P2.
P45:
When someone leaves a job, he or she will be given a P45. This shows income
and tax figures for the tax year up to the leaving date.
It comes in four parts, each showing the
same information:
Part 1 - Sent this to the employer's tax office.
Part 1A - For the individual's own records.
Parts 2 & 3 - To be given to any new employer. One part is sent to the new
tax office, the other is used for the next payroll calculation in the new
job.
P60:
A P60 shows pay and tax for a particular tax year, along with other
connected bits of information.
P85:
The form P85 asks all the relevant questions when someone goes overseas for
some time. This allows the tax office to decide how the person’s tax affairs
should be handled after leaving the UK.
The P85 also allows for a refund of tax
to be claimed if there will not be any more taxable income here for the rest
of that tax year.
P86:
The form P86 asks all the relevant questions when someone arrives in the UK
for the first time, or after being overseas for some time. It allows the tax
office to decide how the person’s tax affairs should be handled in the UK.
The P86 may also have a form DOM 1
attached, which can be used to make a domicile ruling if necessary.
P9D:
Taxable company benefit provided to an employee is shown on a form P11D.
However, company benefits are not
taxable if the employee is paid at a rate of less than £8500 per year. In
this case, the employer advises the revenue of the situation on a form P9D.
Only one is needed for all affected employees of the company.
Partnership:
Some organisations are formed on a partnership basis rather than as a
limited company. This is where two or more individuals join up in business.
Special rules apply to the profits of the partnership, and how they are
dealt with for tax purposes.
PAYE:
PAYE stands for Pay as You Earn.
As you earn money, your employer will
work out how much money you should pay, and will pass it across to the
Revenue on your behalf.
Payment on
Account:
Payments on account arise when a person has a tax bill for a particular year
that is more than 20% of the total tax liability for the year.
The payments can be seen as advance
payments for the next year's bill. They come in two stages in January and
July, each equalling half of the tax outstanding for the year before.
The best way to explain is probably an
example.
Miss X's total tax liability for the tax year 2000/01 was £7500. But most of
her income was from renting a property and was not taxed before she got it.
So, she had to pay a lump sum of £5000.
As £5000 is more that 20% of £7500 she
will be asked to pay on account, for the next tax year, 2001/02. The
payments will be £2500 twice, payable by 31 Jan
2002 and 31 July 2002.
If next year's tax bill is likely to be
reduced (in Miss X's case may be she sold the property) the payments on
account can be as well. However, interest may be charged if the reduction is
too great.
Pension:
A pension is the payment made to you from a pension scheme, or from your
entitlement to State Retirement Benefit. It is taxable, but is not
chargeable to National Insurance.
PEP:
Stands for Personal Equity Plan. They were a form of tax free investment in
the nineties, now replaced by the ubiquitous ISA.
Personal
Allowance:
This allowance is available to everyone. In the current tax year, it is
£4615, which means the first £4615 of income is tax-free.
The allowance makes a basic rate
taxpayer £1015.30 better off, and a higher rate taxpayer by £1846 better
off.
Plant: This is usually lumped together with plant, and called "plant and machinery". Together they are a loose t
erm for any items used in business on
an ongoing basis. (As opposed to things like stock, raw materials and other
disposables.)
Machinery includes such things as office
furniture, shop tills etc.
A tax deduction cannot be claimed for
the purchase cost. Instead, the cost of depreciation is claimed, known as a
Capital Allowance.
Profit:
This is simply income less expenses. It could apply to trading income,
rental of a property, or even sale of an asset.
The taxable profit of a business may not
be the same as the trading profit. This is because some expenses shown in
business accounts are not allowable for tax purposes.
Rateable Value:
Every property used to have a rateable value, which was used to work out the
amount of local rates payable. The rateable value of a property is still used where
an employer provides accommodation for an employee.
Reducing
Payments on Account : Payments on account arise because a large tax bill arises in one year. In
many case, this will happen year on year, and the payments should be made.
In some instances, there will not be a large bill next year. (For example,
if a person goes from being self employed to being PAYE, most of the tax
payable will be deducted from salary.
In these cases, the payments on account
can be reduced, to NIL if required.
It is important to remember that
interest may be charged if the reduction is too great, and a tax bill does
arise in the year.
If a relief can be claimed, it will do
this. Consequently, a relief will reduce the tax burden.
Many different types of relief are
available. As a general guide, many outgoing, such as contributions to
pension schemes, qualify for tax relief. Whoever the payments were made to can advise if tax relief applies. Rental Expenses : When a property is rented out, many of the expenses incurred in the
rental, such as property agents' fees, or cleaning costs, can be claimed as
a deduction from the rental accounts.
Rental Expenses : Rental expenses fall into two categories.
1. 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.
2. Capital Expenses: These are expenses on the fabric of the property. For
instance, an extension to a house, or new wiring. These improve the
property, and usually increase its value. Such expenses can only be claimed
against any future capital gains tax.
Some expenses may be seen as capital
expenditure, but because they are necessary to make the property habitable,
they are allowed as revenue expenses. For example, replacing a broken toilet
with a new one.
Retirement
Relief : Capital Gains Tax is often payable when a business or business assets are
sold for a profit. Retirement relief stops this happening when the only
reason for the sale is the retirement of the proprietor.
If Retirement Relief is available, the
first £50,000 profit on sale of a business will be exempt from Capital Gains
Tax. Thereafter, only half of the next £150,000 profit is chargeable. When
the profit exceeds £200,000, any excess is taxable in full.
Although the rules are necessarily
complicated, the claimant must usually be over 50 (although a claim is still
possible if for retirement due to ill-health below that age). After that, it
must be proved that the retirement is genuine.
Rollover Relief : Rollover Relief can be claimed against Capital Gains Tax due on sale of a
Business Asset.
Basically, a new asset must be purchased
out of the proceeds of the disposal. Assuming this qualifies for relief, the
gain will be "rolled over" until the eventual disposal of the new asset.
For example, a shop is sold giving a chargeable gain of £25000. A new shop is then purchased for £100,000. If Rollover Relief is claimed, when the new shop is eventually sold, an effective purchase price of £75000 will be used.
Salary and
Wages : The taxable income from your job is known technically as the "emoluments
of the employment". Basically this just means your salary and wages, plus
company benefits, tips and bonuses, and even expenses paid to you.
Sub-contractors : New rules regarding the tax treatment of payments made to sub-contractors
in the construction industry were introduced in 1999. These are part of the
Construction Industry Scheme, which replaces the old SC60 system.
Subject to stringent rules, a
sub-contractor can register for payments to be made gross, without any tax
being deducted. A CIS 6 certificate will be given to be shown to the
contractor for this to happen.
In most cases though, the criteria will
not be met, and a Registration card, CIS 4, will be given instead. This will
mean that the contractor deducts 18% tax from the payments made. Whenever
this happens, a voucher CIS 25 should be given to the sub-contractor showing
the payments and the tax retained.
Travel Expenses : If you have to travel on business, you may be able to claim any cost to
you as an expense.
Business travel in this instance does
not usually include travel from your home to your office, but can cover you
if you have to go to a temporary place of work.
VAT : Short for Value Added Tax. This is an indirect tax assessed as a
percentage of the value of all goods and services, unless specifically
exempted.
It is a consumption tax because it is
paid by the end consumer. VAT-registered businesses can deduct VAT paid on
purchases for business activities from their VAT liability.
The standard rate of VAT in the UK is
17.5%. A lower rate of 5% applies to Domestic Fuel, Home Energy-saving
Products and Women's Sanitary Products.
Working
Families Tax Credit : From April 2003 this credit is worked out in conjunction with the
children's tax credit. It is available to :
· Families - either couples or lone parents
· Who have one or more dependant children under 16 (or under 19 if in
full-time education)
· Where one or both partners work at least 16 hours a week, whether as an
employee or a self-employed person
· Are resident in the United Kingdom, and entitled to work here
· Have savings of £8,000 or less (excluding any business assets, the family
home and possessions)
This tax credit is means tested.
Therefore your entitlement to the tax credit will be determined by the
number of qualifying children you have, along with your net weekly family
income.
Writing Down
Allowance : Writing Down Allowance is the term used for the whole of the annual
depreciation, used in Capital Allowances computations. It is abbreviated to
WDA.
It is usually 25% of the value of the
asset at the start of the period, but sometimes up to 100% can be used. The
amount is apportioned if there is any private use of the asset. This leaves
the business element - or the Capital Allowance to be claimed.
Written Down Value : The Written Down Value (or WDV) is the depreciated value of an asset amount after Writing Down Allowances have been worked out. It is carried forward to be used as the basis for next year's calculation.