Tax Terms – a contractor’s A-Z!

Trying to navigate the intricate world of tax can be confusing and frustrating; it’s almost like those in charge (we’re looking at you HMRC) make it difficult on purpose.

This A-Z guide is your go-to resource for unravelling the jargon and understanding the tax and payroll terms you need to know.

At source
When tax is taken out of your income before you are paid. This usually applies when you are employed PAYE or self-employed under CIS. Both terms we’ll explain later!

Auto-enrolment
The process of placing employees into a workplace pension scheme. Employers must do this if you are aged between 22 and State Pension age and earn £10,000 or more per year.

Basic Rate Tax
This is currently 20% and is the amount deducted from your gross wage after you have earned over the Personal Allowance.

Expenses
If you are employed, these could include travel expenses, meals or lodging. Self-employed people can claim back expenses incurred in doing their job.

CIS
CIS stands for the Construction Agency Scheme, an HMRC scheme which determines how you pay tax if you are self-employed and work in construction. Under the rules of the scheme, tax is paid at source, at a rate of 20% if you are registered for CIS, 30% if you are not. 

Coding Notice
This is a letter from HMRC telling you about a change in your tax code. Your employer will usually get a copy so they can deduct the correct amount of tax from your wages.

Gross Income
The amount you earn before any employee deductions, including tax and National Insurance, are made. 

HMRC
Her Majesty’s Revenue and Customs – the government department that deals with tax.

Higher Rate Tax
The top income tax band, in which a rate of 40% tax is paid currently. Click here for more information on tax rates and allowances for 2023/24

National Insurance
You pay National Insurance contributions (NIC) to qualify for certain benefits including the state pension. In old jargon this was also called your “stamp”. You normally stop paying this at State Pension age. The different types and rates of NIC are known as “Classes”. The type you pay depends on your employment status – Class 1 for employees, Classes 2 & 4 for the self-employed. Employers also have to pay Employers NIC at 13.8%

National Insurance Number or NI No.
Your National Insurance number is a unique number allocated to you and ensures your NI contributions are recorded properly for your entitlement to certain benefits. 

Net Income
The income you receive after any deductions, including tax and National Insurance, are made. 

P11D
An HMRC form you receive from your employer at the end of the tax year detailing any taxable benefits you have received, eg. A company car or medical cover.

P45
An HMRC form that your employer gives you when you leave employment stating how much you have earned and how much tax you have paid in the tax year to date.

P60
An HMRC form issued at the end of each tax year by your employer. It shows your total earnings and tax paid in one tax year. 

PAYE
This stands for Pay As You Earn. It is the usual tax scheme for employees, where your employer deducts tax and National Insurance from your wages before paying you.

Personal Allowance
This is the amount you can earn each year without paying tax. For the 2023/24 tax year this is set at £12,570. 

Remittance
Remittance refers to money being sent from one party to another. For example, if you are self-employed you receive a remittance advice statement stating how much you have been paid. 

SA1
A form that allows you to register for self assessment for any other reason other than self-employment. An example would be a landlord with income from property.

SA23
A letter from HMRC letting you know if you have overpaid or underpaid tax.

Self Assessment
The tax return system HMRC uses to collect income tax where it isn’t deducted automatically from wages, pensions or savings. People and businesses with other income must report it in a self assessment tax return. 

Tax Code
Your tax code is a combination of numbers and letters which tells your employer how much tax to deduct from your wages. Click here to decipher your tax code 

Tax Year
The UK tax year starts on 6th April each year and ends on 5th April the following year.

UTR
UTR stands for Unique Tax Reference – a 10 digit number that is unique to you and identifies you personally with HMRC for anything related to your personal tax. 

VAT
VAT stands for Value Added Tax, which is a tax levied on the purchase price of goods and services. You don’t have to worry about it if you are employed (including umbrella contractors) but if you are self-employed you must register for VAT if your taxable turnover is more than £85,000.

Zzzzz…
We know tax is a bit of a yawn! But we hope you’ve found this A-Z of tax terms useful, if not exciting!

Further reading 

Understanding Your Tax Code for 2023/24

Tax Rates and Allowances for 2023/24