Self-employed money terms, translated

You shouldn’t need to learn a second language to manage your working life. Here are the terms that come up most often, with the detail kept where it is useful.

Business and records

Sole trader: a person running a business in their own name or a trading name, without a separate company. They are personally responsible for its debts.

Limited company: a separate legal entity. Its money belongs to the company, even if one person owns all the shares.

Turnover or revenue: business income before costs. It is different from profit and from the amount currently in the bank.

Profit: income less costs, with tax adjustments where needed. Accounting profit and taxable profit can differ.

Drawings: money a sole trader takes from the business for personal use. Drawings aren’t a business expense or a salary paid to yourself.

Cash basis: recording income when received and expenses when paid, subject to the tax rules. This is the standard method for eligible sole traders and partnerships without corporate partners.

Traditional accounting: recording income and expenses when earned or incurred, rather than simply when cash moves.

Capital allowances: a form of tax relief for qualifying business assets. Whether they apply depends on the asset and accounting method; buying a computer does not automatically mean using capital allowances.

Sources: GOV.UK: structures, HMRC: cash basis, expenses, equipment.

Tax and reporting

HMRC: His Majesty’s Revenue and Customs, the UK tax authority.

Self Assessment: the system for reporting relevant income and working out personal tax. It can include employment income as well as income without tax deducted.

UTR: Unique Taxpayer Reference. It is a ten-digit tax reference, separate from your National Insurance number. A company has its own tax reference.

Tax year: for UK personal tax, 6 April to the following 5 April. A company’s accounting period can be different.

Personal Allowance: income you can receive before Income Tax under the allowance rules. It can be reduced at higher adjusted net income.

Trading allowance: relief of up to £1,000 against eligible trading income. It generally replaces actual expenses rather than being added to them, and has exceptions.

Payments on account: advance instalments towards a Self Assessment bill. They are normally based on the previous year’s relevant liability.

VAT: Value Added Tax, charged on taxable supplies by registered businesses. Different rates and exemptions apply. VAT registration tests use taxable turnover, not profit.

Making Tax Digital: requirements for digital records and reporting through compatible software. VAT and Income Tax have separate MTD regimes.

Sources: HMRC: Self Assessment, UTRs, Income Tax, trading allowance, payments on account, VAT, MTD.

Pensions and protection

Net pension contribution: what you personally pay into a relief-at-source pension.

Gross pension contribution: that payment plus the basic-rate relief added by the provider.

Annual allowance: a limit on pension saving before an annual allowance tax charge may arise, taking account of the relevant rules. It is separate from the earnings limit for personal tax relief.

Carry forward: using eligible unused pension annual allowance from earlier years. It does not bring old earnings into the current year’s personal tax-relief limit.

State Pension: government retirement income based on your NI record and the applicable rules. It is separate from a personal or workplace pension.

IR35: rules concerning work through an intermediary where the relationship would otherwise be employment for tax purposes. Ordinary employment-status rules still matter for people working directly as sole traders.

Professional indemnity: insurance addressing certain claims about professional mistakes or advice. Public liability addresses certain injury or property-damage claims. Actual cover depends on the policy.

Sources: HMRC: pension relief, annual allowance, carry forward, DWP: State Pension, HMRC: IR35, MoneyHelper: insurance.