Accounting and tax,in plain English.

135 terms you will meet running a UK business, each explained with a worked example and why it matters to you.

Ask an accountant Tax calculators

A

Accounting equation: The accounting equation states that a business's assets always equal its liabilities plus its equity, which is why every balance sheet balances.
Accounting period: An accounting period is the span of time, usually 12 months, that a set of accounts or a tax return covers, ending on the business's year end date.
Accounts payable: Accounts payable is the money a business owes its suppliers for goods or services it has received and been invoiced for but not yet paid.
Accounts receivable: Accounts receivable is the money customers owe a business for goods or services already delivered and invoiced but not yet paid for.
Accrual accounting: Accrual accounting records income when it is earned and expenses when they are incurred, regardless of when the money is actually received or paid.
Accruals: Accruals are expenses a business has incurred in a period but has not yet been billed for or paid, recorded so the accounts show the true cost.
Allowable expenses: Allowable expenses are business running costs that can be deducted from income to work out taxable profit, provided they are incurred wholly and exclusively for the business.
Amortisation: Amortisation is the gradual write-off of the cost of an intangible asset, such as goodwill, a licence or software, over the years the business benefits from it.
Annual Investment Allowance (AIA): The Annual Investment Allowance is a UK tax relief that lets a business deduct the full cost of qualifying equipment, up to £1 million a year, from its taxable profits.
Assets: Assets are resources a business owns or controls that are expected to bring it future value, such as cash, stock, money owed by customers, equipment and property.
Auto-enrolment: Auto-enrolment is the UK law requiring employers to put eligible workers into a workplace pension automatically and pay contributions, unless the worker chooses to opt out.

B

Bad debt: A bad debt is an amount a customer owes your business that you no longer expect to be paid, so it is written off as a cost in your accounts.
Balance sheet: A balance sheet is a financial statement showing what a business owns, what it owes and the owners' stake in it at a single point in time.
Bank reconciliation: A bank reconciliation is the process of matching the transactions in your accounting records to your bank statement, so both show the same balance and nothing is missing.
Benefit in kind: A benefit in kind is a non-cash perk an employee or director receives through their job, such as a company car or private medical cover, usually taxed as income.
Break-even point: The break-even point is the level of sales at which total income exactly covers total costs, so the business makes neither a profit nor a loss.
Business Asset Disposal Relief: Business Asset Disposal Relief reduces Capital Gains Tax to 18% from April 2026 on qualifying gains when you sell all or part of your business, up to £1 million.

C

CapEx (capital expenditure): CapEx, short for capital expenditure, is money a business spends buying or improving long-term assets such as equipment, vehicles, property or computers.
Capital allowances: Capital allowances are the UK tax relief businesses claim on the cost of equipment, machinery and vehicles, in place of depreciation, which is not tax deductible.
Capital Gains Tax: Capital Gains Tax (CGT) is tax on the profit you make when you sell or give away an asset, such as shares, a second property or business assets.
Cash basis accounting: Cash basis accounting records income when money is actually received and expenses when they are actually paid, rather than when invoices are issued or bills arrive.
Cash flow: Cash flow is the movement of money into and out of a business over a period, showing whether it has enough cash to pay its bills.
Cash flow forecast: A cash flow forecast is a month-by-month estimate of the cash a business expects to receive and pay out, and the bank balance it will be left with.
Chart of accounts: A chart of accounts is the complete, numbered list of accounts a business uses to categorise every transaction, from bank and sales to rent, wages and VAT.
CIS (Construction Industry Scheme): CIS, the Construction Industry Scheme, makes contractors deduct tax from payments to subcontractors and pay it to HMRC as an advance on the subcontractor's tax bill.
Companies House: Companies House is the UK government agency that registers limited companies and LLPs and keeps the public record of their accounts, officers and owners.
Confirmation statement: A confirmation statement is the annual filing every UK company makes at Companies House to confirm its registered details, such as officers, shareholders and registered office, are correct.
Corporation Tax: Corporation Tax is the tax UK limited companies pay on their taxable profits, at 19% for profits up to £50,000 and 25% for profits of £250,000 or more.
Cost of goods sold (COGS): Cost of goods sold (COGS) is the direct cost of producing or buying the goods a business actually sold in a period, such as stock, materials and direct labour.
Credit note: A credit note is a document a seller issues to reduce or cancel an invoice, for example after a refund, a return or an overcharge.
Creditors: Creditors are the people and organisations a business owes money to, such as suppliers, HMRC, banks and lenders, shown as liabilities on the balance sheet.
Current assets: Current assets are resources a business owns that it expects to use up or convert into cash within twelve months, such as cash, stock and money owed by customers.
Current liabilities: Current liabilities are amounts a business owes that are due for payment within 12 months, such as supplier bills, VAT, PAYE, Corporation Tax and overdrafts.
Current ratio: The current ratio is current assets divided by current liabilities, and shows whether a business has enough short-term resources to pay the bills due within a year.

D

Debtors: Debtors are customers and other parties who owe a business money, usually for invoices not yet paid, shown as a current asset on the balance sheet.
Deferred income: Deferred income is money a business has received in advance for goods or services it has not yet provided, held as a liability until it is earned.
Depreciation: Depreciation is the accounting charge that spreads the cost of a long-term asset, such as equipment or a van, over the years it is used.
Director's loan account: A director's loan account is the record of money moving between a director and their company that is not salary, dividends or repaid expenses.
Dividend: A dividend is a payment a company makes to its shareholders out of profits that have already had Corporation Tax deducted.
Dividend allowance: The dividend allowance is the first £500 of dividend income each tax year, which is taxed at 0% whatever your income tax band.
Dormant company: A dormant company is a registered company that is not trading and has no significant accounting transactions during its financial year.
Double-entry bookkeeping: Double-entry bookkeeping is the method of recording every transaction in two accounts, as a debit in one and an equal credit in another, so the books always balance.

E

EBIT: EBIT, earnings before interest and tax, is the profit a business makes from its trading activities before loan interest and tax are taken off.
EBITDA: EBITDA, earnings before interest, tax, depreciation and amortisation, measures the profit a business makes from its operations before financing, tax and non-cash charges.
EIS: The Enterprise Investment Scheme (EIS) gives investors 30% income tax relief on new shares in qualifying UK trading companies, plus Capital Gains Tax advantages.
Emergency tax code: An emergency tax code is a temporary code your employer uses when HMRC has not yet confirmed your correct code, usually 1257L with W1, M1 or X after it.
Entertainment expenses: Entertainment expenses are hospitality costs such as meals, drinks and events, and HMRC treats entertaining clients very differently from entertaining staff.
Equity: Equity is the owners' stake in a business: what would be left from its assets after every liability had been paid off.

F

FIFO (first in, first out): FIFO, first in first out, is a stock valuation method that assumes the oldest items bought are sold first, so closing stock is valued at the latest prices.
Financial year: A financial year is the 12-month period a business uses for its accounts, which for a UK company ends on its chosen accounting reference date.
Fixed assets: Fixed assets are items a business owns and uses over several years to run its operations, such as property, machinery, vehicles and computers.
Fixed costs: Fixed costs are business expenses that stay broadly the same each month regardless of how much you sell, such as rent, insurance and salaries.
Flat Rate VAT Scheme: The Flat Rate VAT Scheme lets small VAT-registered businesses pay HMRC a fixed percentage of their VAT-inclusive turnover instead of working out VAT on every sale and purchase.

G

General ledger: The general ledger is the master record of a business's accounts, holding every transaction sorted into categories such as sales, expenses, assets and liabilities.
Going concern: Going concern is the accounting assumption that a business will keep trading for the foreseeable future, normally at least 12 months from the date its accounts are approved.
Goodwill: Goodwill is the extra amount paid when buying a business above the fair value of its identifiable net assets, reflecting things like reputation, customer relationships and trained staff.
Gross margin: Gross margin is gross profit divided by sales, expressed as a percentage, showing how much of each pound of revenue is left after direct costs.
Gross pay: Gross pay is the total amount an employee earns in a pay period before income tax, National Insurance, pension contributions or any other deductions are taken off.
Gross profit: Gross profit is revenue minus the direct cost of the goods or services sold, showing how much a business makes on its sales before overheads.
Gross vs net: Gross is an amount before deductions such as tax, VAT or costs are taken off, and net is the amount left after those deductions.

H

HMRC: HMRC (HM Revenue and Customs) is the UK government department that collects taxes, pays some benefits and enforces tax and customs rules.

I

Input VAT: Input VAT is the VAT a VAT-registered business pays on its business purchases and expenses, which it can usually reclaim from HMRC on its VAT return.
Intangible assets: Intangible assets are valuable resources with no physical form, such as goodwill, trademarks, patents, software and customer lists, that a business owns and uses for more than a year.
Invoice: An invoice is a document a business sends a customer requesting payment for goods or services supplied, showing what was provided, the amount due and when.
IR35: IR35, the off-payroll working rules, makes contractors working through their own company pay employment-level tax when the engagement would be employment if they were hired directly.

J

Journal entry: A journal entry is a manual posting of equal debits and credits to two or more ledger accounts, used mainly for adjustments that are not invoices, bills or bank payments.

L

Liabilities: Liabilities are amounts a business owes to other people or organisations, such as suppliers, HMRC, banks and its own directors, that it will have to pay in future.
Limited company: A limited company is a business registered at Companies House that is legally separate from its owners, whose liability for its debts is limited to what they invested.
Liquidity: Liquidity is a business's ability to pay its short-term bills on time, using cash or assets that can quickly be turned into cash.
LLP (limited liability partnership): An LLP, or limited liability partnership, is a UK business structure where members share profits like partners but have limited liability like company shareholders.

M

Making Tax Digital (MTD): Making Tax Digital (MTD) is HMRC's programme requiring businesses and landlords to keep digital records and send tax updates using compatible software.
Management accounts: Management accounts are internal financial reports, usually monthly or quarterly, that show a business's profit, cash position and performance to help owners make decisions.
Markup: Markup is the amount added to the cost of a product or service to arrive at its selling price, usually expressed as a percentage of the cost.
Marriage allowance: Marriage allowance lets a lower-earning spouse or civil partner transfer £1,260 of their personal allowance to their partner, cutting the couple's tax by up to £252 a year.
Mileage allowance: Mileage allowance is the amount per business mile HMRC lets employers pay tax-free, or self-employed people claim, for using a private vehicle for work.

N

National Insurance: National Insurance is a UK tax on earnings and self-employed profits, paid by workers and employers, which also builds your entitlement to the State Pension and some benefits.
Net 30: Net 30 is a payment term meaning the customer must pay the full invoice amount within 30 days of the invoice date.
Net pay: Net pay, or take-home pay, is the amount an employee actually receives after income tax, National Insurance, pension contributions and any other deductions have been taken from gross pay.
Net profit: Net profit is what a business earns after every cost has been deducted from revenue, including direct costs, overheads, interest and tax.
Nominal ledger: The nominal ledger is the main record of a business's accounts, holding a running total for every income, expense, asset, liability and equity account in the chart of accounts.

O

Operating profit: Operating profit is the profit a business makes from its normal trading activities after deducting direct costs and overheads, but before interest and tax.
OpEx (operating expenditure): OpEx, or operating expenditure, is the ongoing spending needed to run a business day to day, such as wages, rent, utilities and software subscriptions.
Output VAT: Output VAT is the VAT a VAT-registered business charges its customers on sales, which it collects on HMRC's behalf and pays over on its VAT return.
Overheads: Overheads are the ongoing costs of running a business, such as rent, insurance and software, that are not linked to any particular product or job.

P

P11D: A P11D is the form employers use to report benefits in kind and certain expenses given to employees and directors, so HMRC can tax them.
P32: A P32 is an employer's monthly record of the PAYE tax, National Insurance and other deductions owed to HMRC, after any amounts the employer can recover.
P45: A P45 is the form an employer gives you when you leave, recording your tax code and the pay and tax deducted so far in the tax year.
P60: A P60 is the end-of-year certificate your employer gives you, showing your total pay and the income tax and National Insurance deducted in that tax year.
P800: A P800 is a tax calculation HMRC sends after the tax year ends if you paid too much or too little income tax through PAYE.
Partnership: A partnership is a business owned and run by two or more people who share its profits and, in an ordinary partnership, share personal responsibility for its debts.
PAYE: PAYE, Pay As You Earn, is HMRC's system for collecting income tax and National Insurance from employees' wages through the employer's payroll every time they are paid.
Payments on account: Payments on account are two advance payments towards your next Self Assessment tax bill, each normally half of the previous year's bill, due on 31 January and 31 July.
Personal allowance: The personal allowance is the amount of income most people can receive each tax year without paying income tax, set at £12,570 for 2026/27.
Petty cash: Petty cash is a small amount of physical money a business keeps on site to pay for minor expenses, such as postage, milk or taxi fares.
Prepayments: A prepayment is an expense paid in advance that relates to a later accounting period, held on the balance sheet as an asset until it is used up.
Pro rata: Pro rata means in proportion: a pro rata salary, holiday or fee is the full amount scaled down to the share of time actually worked or used.
Profit and loss account: A profit and loss account, or P&L, is a financial statement showing a business's income, costs and resulting profit or loss over a period such as a month or year.
Profit margin: Profit margin is profit expressed as a percentage of sales, showing how many pence of each pound of revenue a business keeps.
Proforma invoice: A proforma invoice is a preliminary bill sent before goods or services are supplied, setting out what will be charged; it is not a demand for payment for VAT purposes.
Purchase order: A purchase order is a document a business sends a supplier confirming exactly what it wants to buy, the quantity and the price, before anything is supplied.

R

Reducing balance depreciation: Reducing balance depreciation charges a fixed percentage of an asset's remaining book value each year, so the charge is highest in the first year and falls after that.
Registered office address: A registered office address is the official address of a UK company, shown publicly at Companies House, where legal documents and government letters are sent.
Remittance advice: A remittance advice is a note a customer sends a supplier to say a payment has been made and which invoices it settles.
Retained earnings: Retained earnings are the accumulated profits a company has kept in the business after paying tax and dividends, shown in the equity section of the balance sheet.
Revenue: Revenue is the total income a business earns from selling its goods or services in a period, before any costs, tax or expenses are taken off.
Revenue expenditure: Revenue expenditure is spending on the day-to-day running of a business, such as wages, rent and repairs, which is charged in full to the profit and loss account.
Reverse charge VAT: Reverse charge VAT is a rule that makes the customer, not the supplier, account for the VAT on certain supplies, such as construction services and many services bought from abroad.
RTI (Real Time Information): Real Time Information (RTI) is the system UK employers use to report employees' pay, tax and National Insurance to HMRC every time they are paid.

S

S455 tax: S455 tax is a temporary Corporation Tax charge of 33.75% on loans to company directors or shareholders that are still unpaid nine months and one day after year end.
SA302: An SA302 is the tax calculation produced from your Self Assessment return, showing your income and the tax due, often used as proof of income.
Salary sacrifice: Salary sacrifice is an agreement to give up part of your contractual pay in return for a non-cash benefit, usually employer pension contributions, saving tax and National Insurance.
SEIS: The Seed Enterprise Investment Scheme (SEIS) gives investors 50% income tax relief on new shares in young UK trading companies, helping startups raise early money.
Self Assessment: Self Assessment is HMRC's system for collecting income tax and National Insurance from people whose income is not fully taxed at source, using an annual tax return.
Share capital: Share capital is the money a limited company raises by issuing shares, recorded at the shares' nominal value in its balance sheet.
Share premium: Share premium is the amount a company receives for newly issued shares above their nominal (par) value, held in a separate share premium account on the balance sheet.
SIC code: A SIC code is a five-digit Standard Industrial Classification number that tells Companies House what kind of business activity a company carries out.
Sole trader: A sole trader is a self-employed person who owns and runs a business as an individual, keeps all the profits and is personally responsible for its debts.
Stock valuation: Stock valuation is how a business values the goods it holds at its year end, normally at the lower of their cost and what they can be sold for.
Straight-line depreciation: Straight-line depreciation spreads the cost of a fixed asset evenly over its useful life, charging the same amount to profit each year.
Subsistence allowance: Subsistence allowance covers reasonable costs of food, drink and sometimes accommodation when someone travels away from their normal workplace for work.
Suspense account: A suspense account is a temporary holding account for transactions whose correct category is not yet known, which should be investigated and cleared before accounts are finalised.

T

Tax return: A tax return is the annual form, usually the SA100 for individuals, on which you report income and gains to HMRC so it can work out the tax you owe.
Tax year: The UK tax year runs from 6 April to 5 April the following year, and is the period HMRC uses for income tax, National Insurance and Capital Gains Tax.
Trading allowance: The trading allowance is a £1,000 yearly tax exemption for income from self-employment, casual work or selling, so small side earnings can be received tax free.
Trial balance: A trial balance lists every ledger account with its debit or credit balance, to check that total debits equal total credits before the accounts are prepared.
Turnover: Turnover is the total value of sales a business makes in a period, before any costs or expenses are taken off and excluding VAT.

U

UTR number: A UTR number is a 10-digit Unique Taxpayer Reference that HMRC issues to individuals and companies so it can identify them for Self Assessment or Corporation Tax.

V

Variable costs: Variable costs are business costs that rise and fall in line with how much you sell or produce, such as materials, packaging, delivery and sales commission.
VAT exempt: VAT exempt goods and services are outside the VAT charge altogether, so no VAT is added to the price and the seller usually cannot reclaim VAT on related costs.
VAT registration: VAT registration is signing up with HMRC to charge and account for VAT, compulsory once VAT-taxable turnover passes £90,000 in any rolling 12-month period.
VAT return: A VAT return is the report a VAT-registered business sends HMRC, usually every quarter, showing the VAT charged on sales and the VAT reclaimed on purchases.
VAT threshold: The VAT threshold is the level of taxable turnover, currently £90,000 over any rolling 12 months, above which a UK business must register for VAT.

W

Working capital: Working capital is the money available to run day-to-day operations, worked out as current assets minus current liabilities.

Y

Year end: Year end is the last day of a business's financial year, the date its annual accounts are drawn up to and from which its filing deadlines are counted.

Z

Zero-rated VAT: Zero-rated VAT means goods or services are VAT-taxable but at a rate of 0%, so the customer pays no VAT but the seller can still reclaim input VAT.

Let’s talk aboutyour business.

Tell us where you are, what you need help with and how you would like to work. We’ll start with a conversation.

Book a discovery call→Request a quote↗Email Cloudkeepersinfo@cloud-keepers.co.uk Call Cloudkeepers020 7118 9799

124 City Road, London EC1V 2NX