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 in where it helps.

Business and records

Sole trader: someone who runs a business in their own name or a trading name, without a separate company. They’re 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’s not the same as profit, or as the amount in the bank right now.

Profit: income minus costs, with tax adjustments where needed. Accounting profit and taxable profit can be different.

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

Cash basis: recording income when it’s received and expenses when they’re paid, subject to the tax rules. It’s the standard method for qualifying sole traders and partnerships without corporate partners.

Traditional accounting: recording income and expenses when they’re earned or incurred, rather than just when cash moves.

Capital allowances: a type of tax relief for qualifying business assets. Whether they apply depends on the asset and the accounting method. Buying a computer doesn’t 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 income from a job as well as income that hasn’t had tax taken off.

UTR: Unique Taxpayer Reference. It’s 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: the income you can get before Income Tax, under the allowance rules. It can be reduced at higher levels of adjusted net income.

Trading allowance: relief of up to £1,000 against qualifying trading income. You generally use it instead of your actual expenses, not on top of them. There are exceptions.

Payments on account: advance payments towards a Self Assessment bill. They’re usually based on the relevant amount you owed for the previous year.

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

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

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. Above it, an annual allowance tax charge may arise, taking account of the relevant rules. It’s separate from the earnings limit for personal tax relief.

Carry forward: using qualifying unused pension annual allowance from earlier years. It doesn’t let you count earnings from earlier years towards this year’s personal tax-relief limit.

State Pension: retirement income from the government, based on your NI record and the rules that apply. It’s separate from a personal or workplace pension.

IR35: rules about work done through an intermediary where, without the intermediary, the relationship would be employment for tax purposes. The ordinary employment-status rules still matter for people working directly as sole traders.

Professional indemnity: insurance that deals with certain claims about professional mistakes or advice. Public liability deals with certain claims about injury or damage to property. What’s actually covered depends on the policy.

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