English for Tax: Essential Vocabulary & Phrases

"taxable income"

The portion of gross income that is subject to tax after all allowable deductions and exemptions have been applied.

"After deducting pension contributions and the personal allowance, her taxable income was £28,000."

"personal allowance"

The amount of income a taxpayer can earn each year before income tax becomes payable.

"The personal allowance for the current tax year is £12,570, unchanged from the previous year."

"self-assessment return"

A tax return filed directly by an individual or business to declare income and calculate the tax owed.

"Freelancers must file a self-assessment return by 31 January each year for the previous tax year."

"marginal tax rate"

The rate of tax applied to the last pound or dollar of income earned, which increases as income rises through each bracket.

"His marginal tax rate jumped to 40% once his salary exceeded the higher-rate threshold."

"tax credit"

A direct reduction in the amount of tax owed, as opposed to a deduction which only reduces taxable income.

"The working tax credit reduced her final tax bill by £1,200."

"pay as you earn (PAYE)"

A system in which employers deduct income tax and national insurance directly from employees' wages before payment.

"Most salaried employees pay income tax through PAYE and never need to file a return."

"tax band"

One of the income ranges to which different rates of tax are applied under a progressive tax system.

"Income between the basic-rate and higher-rate thresholds falls into the 20% tax band."

"tax relief"

A reduction in income tax liability granted by the government for specific expenditures such as pension contributions or charitable donations.

"He claimed tax relief on his pension contributions, reducing his bill by £800."

"accounting period"

The twelve-month period for which a company prepares financial accounts and computes its corporation tax liability.

"The company's accounting period runs from 1 April to 31 March each year."

"capital allowance"

A tax deduction that allows businesses to write off the cost of qualifying capital assets against taxable profits.

"The factory purchased new machinery and claimed capital allowances to reduce its tax bill by £40,000."

"group relief"

A mechanism allowing trading losses of one company in a group to be offset against the profits of another company in the same group.

"The loss-making subsidiary used group relief to transfer £500,000 of losses to the profitable parent company."

"trading loss"

A loss arising when a company's allowable deductions exceed its trading income in an accounting period.

"The trading loss could be carried back to the previous year to generate a tax repayment."

"research and development (R&D) relief"

An enhanced tax deduction or credit available to companies that invest in qualifying research and development activities.

"The tech startup claimed R&D relief worth £120,000 on its software development expenditure."

"associated company"

A company that is under common control with another, relevant for determining the applicable tax rate thresholds.

"Because of its three associated companies, the group's lower-rate threshold was divided by four."

"close company"

A company that is controlled by five or fewer participators, or by any number of participators who are directors.

"As a close company, it was subject to additional rules on loans to participators."

"instalment payments"

Quarterly advance payments of corporation tax required from large companies before the tax is formally assessed.

"Large companies must make instalment payments starting seven months before the end of the accounting period."

"output tax"

VAT that a business charges on its sales of goods or services, which it must pay over to the tax authority.

"The consultancy firm charged 20% output tax on all its invoices to UK clients."

"input tax"

VAT that a business pays on its purchases, which it can reclaim from the tax authority to the extent it relates to taxable supplies.

"The company recovered £15,000 of input tax on its office renovation costs."

"exempt supply"

A supply of goods or services on which no VAT is charged and for which input tax cannot generally be reclaimed by the supplier.

"Financial services and insurance are exempt supplies, so the bank could not reclaim VAT on related costs."

"zero-rated supply"

A taxable supply on which VAT is charged at 0%, allowing the supplier to reclaim input tax on related costs.

"Basic foodstuffs are zero-rated supplies, meaning shoppers pay no VAT but the retailer can reclaim input tax."

"VAT registration threshold"

The level of annual taxable turnover above which a business must register for VAT.

"Once the plumber's turnover exceeded the VAT registration threshold, he had to register within 30 days."

"cash accounting scheme"

A VAT accounting method where output tax is paid only when the customer pays the invoice, not when it is issued.

"The small retailer used the cash accounting scheme to avoid paying VAT before receiving payment from clients."

"reverse charge"

A VAT mechanism under which the recipient of a service, rather than the supplier, accounts for the VAT due.

"Under the construction industry reverse charge, the main contractor paid the VAT directly to HMRC."

"partial exemption"

A situation where a business makes both taxable and exempt supplies and must apportion its input tax recovery accordingly.

"The insurance company applied a partial exemption method to calculate how much input tax it could reclaim."

"double tax treaty"

A bilateral agreement between two countries that determines which country has the right to tax specific types of income and prevents the same income from being taxed twice.

"Under the UK-US double tax treaty, dividends paid by US companies to UK residents are taxed at a reduced withholding rate."

"permanent establishment"

A fixed place of business through which a foreign enterprise carries on its activities in a country, creating a taxable presence there.

"Opening a branch office in Germany created a permanent establishment, obliging the company to pay German corporate tax."

"controlled foreign company (CFC)"

A foreign subsidiary over which a domestic parent has control, whose profits may be attributed to the parent for tax purposes to prevent profit shifting.

"The CFC rules attributed the offshore subsidiary's profits back to the UK parent, increasing its domestic tax charge."

"base erosion and profit shifting (BEPS)"

Tax planning strategies that exploit gaps and mismatches in international tax rules to shift profits to low-tax jurisdictions.

"The OECD's BEPS project introduced 15 action points to curb multinational tax avoidance."

"tax residency"

The country in which an individual or company is considered resident for tax purposes, determining where their worldwide income is taxable.

"After spending fewer than 90 days in the UK, he lost his UK tax residency and was taxed only on UK-source income."

"withholding tax"

Tax deducted at source by the paying company on cross-border payments such as dividends, interest, and royalties before remitting them to the recipient.

"A 15% withholding tax was applied to the dividend before it was remitted to the overseas parent company."

"country-by-country reporting"

A filing requirement for large multinationals to report profits, taxes paid, and economic activity in each jurisdiction where they operate.

"The group's country-by-country report revealed that it paid an effective tax rate of 4% in one low-tax jurisdiction."

"tax treaty relief"

The reduction or elimination of withholding tax on cross-border income available under a double tax treaty between two countries.

"The company applied for tax treaty relief to reduce the withholding rate on royalty payments from 25% to 5%."

"tax avoidance"

The legal use of the tax rules to reduce one's tax liability, which may still be challenged by tax authorities if it lacks genuine commercial purpose.

"The scheme was technically tax avoidance, but HMRC challenged it under the general anti-abuse rule."

"tax evasion"

The illegal non-payment or underpayment of tax, typically through concealing income or providing false information to tax authorities.

"He was convicted of tax evasion after investigators found £300,000 of undeclared offshore income."

"advance tax ruling"

A formal decision from a tax authority confirming how it will treat a proposed transaction or arrangement for tax purposes.

"The company sought an advance tax ruling before restructuring its holding company to confirm the tax treatment."

"general anti-abuse rule (GAAR)"

Legislation giving tax authorities the power to counteract tax arrangements that are abusive even if they are technically within the law.

"The GAAR applied because the sole purpose of the scheme was to obtain a tax advantage with no genuine commercial rationale."

"disclosure of tax avoidance schemes (DOTAS)"

A UK requirement for promoters and users of certain tax avoidance arrangements to notify HMRC.

"The promoter was fined for failing to make a DOTAS disclosure within the required five-day period."

"effective tax rate"

The average rate at which a company or individual is actually taxed, calculated by dividing the total tax charge by pre-tax profit.

"Despite a statutory rate of 25%, the group's effective tax rate was only 18% due to R&D reliefs and exempt dividends."

"tax gap"

The difference between the total amount of tax that should theoretically be collected and the amount that is actually collected.

"HMRC estimated the tax gap at £36 billion, with the largest contribution coming from small business non-compliance."

"enquiry (tax investigation)"

A formal examination by a tax authority into a taxpayer's affairs to check that tax returns are correct and complete.

"HMRC opened an enquiry into the director's expenses after spotting inconsistencies in the company's accounts."

"capital gain"

The profit realised when a chargeable asset is disposed of for more than its acquisition cost.

"She made a capital gain of £80,000 when she sold the buy-to-let property."

"annual exempt amount"

The amount of capital gains a taxpayer can realise each year before capital gains tax becomes payable.

"By using each partner's annual exempt amount, the couple reduced their combined CGT bill significantly."

"rollover relief"

A tax deferral allowing a business to postpone a capital gains tax charge when it reinvests the proceeds from selling a business asset into a new one.

"The farmer used rollover relief to defer the CGT on the sale of fields by reinvesting in new agricultural equipment."

"inheritance tax (IHT)"

A tax charged on the estate of a deceased person above the nil-rate band threshold.

"The estate was valued at £900,000, so inheritance tax was due on the amount above the £325,000 nil-rate band."

"nil-rate band"

The threshold below which an estate is not subject to inheritance tax, currently £325,000 in the UK.

"Transferring the unused nil-rate band from a deceased spouse doubled the survivor's allowance to £650,000."

"business asset disposal relief"

A capital gains tax relief (formerly Entrepreneurs' Relief) that reduces the CGT rate to 10% on qualifying business disposals, up to a lifetime limit.

"The founder claimed business asset disposal relief when selling her company, saving £100,000 in capital gains tax."

"stamp duty land tax (SDLT)"

A tax payable by the buyer on purchases of land and property in England and Northern Ireland above certain threshold values.

"The buyer paid £15,000 in stamp duty land tax on the £500,000 residential property."

"base cost"

The original acquisition cost of an asset, used to calculate the capital gain or loss when the asset is disposed of.

"The base cost of the shares included the purchase price plus the broker's commission paid at the time of purchase."