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Tax Glossary

We have tried to outline all the relevant terms below associated with accountancy, accounting, payroll and tax. 

 

s t u v w x y z

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.
 

Relief’s: The basis of taxation is that taxable income is calculated, and a certain percentage of that amount is payable in tax. It follows that one way to reduce tax is to reduce the taxable income.
 

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.

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