Contractor tax jargon buster
Contractor accounting is full of acronyms and terms that no one ever explains properly. Here are the ones that actually matter, in plain English, with links to our fuller guides where a term deserves one.
Glossary of contractor tax terms
These are simplified explanations written for contractors, using 2026/27 rules and HMRC terminology. They are general information, not a substitute for assessing the facts of a specific engagement or transaction. IR35 and employment status in particular depend on the actual contractual terms and the working practices of each individual engagement, and most of the tax treatments described here apply only where specific conditions are met.
A–C
Accounting reference date (year-end)
The date your company's financial year ends. It sets the clock for your accounts, corporation tax and CT600 deadlines.
Annual Investment Allowance (AIA)
A capital allowance that can give 100% tax relief in the year of purchase on qualifying plant and machinery, subject to the £1 million annual AIA limit and the qualifying-expenditure rules. Common examples include computers, office equipment and tools. Not all expenditure qualifies: cars, for instance, are excluded.
Benefit-in-kind (BIK)
A non-cash benefit provided by your company that is taxable on you personally, such as a company car or private medical cover. An overdrawn director's loan is not automatically a benefit-in-kind: depending on the amount and terms it can give rise to a taxable beneficial-loan charge on the director, a Section 455 Corporation Tax charge on the company, or both.
Business Asset Disposal Relief (BADR)
Formerly Entrepreneurs' Relief, Business Asset Disposal Relief can reduce the Capital Gains Tax rate on qualifying business disposals, including certain disposals of shares in a qualifying personal company and certain distributions on a winding up. Conditions apply, and the lifetime limit for qualifying gains is £1 million.
Confirmation statement
An annual filing to Companies House confirming your company's details (directors, shareholders, registered office) are correct. Separate from your accounts, and due at least once every 12 months.
Corporation tax
Corporation Tax is charged on company profits. For 2026/27 the Small Profits Rate is 19% for profits up to £50,000 and the Main Rate is 25% for profits above £250,000, with Marginal Relief applying between those thresholds. The thresholds can be reduced where a company has associated companies.
CT600
The Company Tax Return filed with HMRC, reporting your company's profits and Corporation Tax. It is normally due 12 months after the end of the accounting period. The tax itself falls due earlier, normally 9 months and 1 day after the end of the accounting period, so the two deadlines should not be confused.
D–I
Deemed payment
Where IR35 applies to an engagement the company assesses itself (Chapter 8), the deemed employment payment is the amount treated as the worker's employment income after the allowable deductions, on which the company operates PAYE and NIC. Under the off-payroll working rules (Chapter 10), where the client makes the status determination, the fee-payer instead deducts PAYE and NIC from the payment. Which mechanism applies depends on who is responsible for determining status and operating PAYE.
Director's loan account (DLA)
A running record of money owed between you and your company outside normal salary, dividends and properly reimbursed expenses. If the account becomes overdrawn, the loan may create a taxable benefit-in-kind for the director and, where the relevant close-company rules apply, a Section 455 Corporation Tax charge for the company.
Dividend
A distribution made by a company to its shareholders, normally out of distributable profits. Dividends are not deductible expenses for Corporation Tax, and they are taxed separately from salary in the shareholder's hands. See salary vs dividends.
Dividend allowance
The slice of dividend income taxed at 0% each year (£500 for 2026/27). Above it, dividends are taxed at rates that step up with your income band.
Flat Rate Scheme (FRS)
A simplified VAT scheme where you pay a fixed percentage of gross turnover to HMRC instead of tracking input VAT. Whether it beats standard VAT depends on your costs. See our VAT guide.
IR35 / off-payroll working
IR35 is the common name for the off-payroll working and intermediaries legislation. It applies where a worker provides services to a client through an intermediary, such as their own limited company, but would have been an employee if engaged directly by the client. Where the rules apply, PAYE and National Insurance consequences arise. Where they do not apply, the intermediary generally receives payment gross and the company remains responsible for its normal tax obligations. Status is assessed engagement by engagement, not for the contractor as a whole.
Inside / outside IR35
Inside IR35 means the off-payroll working rules apply to that engagement, so employment-style PAYE and NIC treatment generally follows. Outside IR35 means the rules do not apply to that engagement, so the intermediary normally receives payment gross and remains responsible for its own tax obligations. Both terms describe the tax status of a particular engagement, not of the contractor.
M–P
Making Tax Digital (MTD)
HMRC's programme requiring digital record-keeping and software-based submissions. It has applied to VAT for some years. MTD for Income Tax is for sole traders and landlords and is being phased in by qualifying income, which is self-employment and property income added together, before expenses. It applies from 6 April 2026 if that was over £50,000 in 2024/25, from 6 April 2027 if over £30,000 in 2025/26, and from 6 April 2028 if over £20,000 in 2026/27. It means compatible software, digital records, quarterly updates and an annual submission finalising the year.
Marginal relief
Marginal Relief reduces the effective Corporation Tax rate for companies with profits between £50,000 and £250,000, so the effective rate on total profits rises gradually from 19% towards 25%. The 26.5% figure is the marginal rate used in the Marginal Relief calculation, applying to each extra pound of profit in that band, not a flat 26.5% on the company's entire profit. The £50,000 and £250,000 thresholds can be reduced where there are associated companies. Modelled in our corporation tax calculator.
Mutuality of obligation (MOO)
The contractual obligation on one party to provide work or pay and on the other to provide personal service. It is one factor considered when determining employment status, but it is not by itself decisive. The Supreme Court's 2024 PGMOL case confirmed that mutuality of obligation and control are necessary elements in the employment-status analysis but are not sufficient on their own to establish employment: the overall picture of the relationship still has to be weighed.
Payments on account
Advance payments towards the following year's Income Tax and Class 4 NIC, normally each equal to 50% of the previous year's relevant liability. The first falls due on 31 January alongside the balancing payment for the year just ended, which is why that January bill is often larger than expected; the second is due on 31 July. They are not generally required where the previous year's relevant liability was under £1,000, or where 80% or more of the tax owed was deducted at source.
P11D
The form used to report taxable benefits-in-kind provided to directors and employees where those benefits have not been payrolled, due to HMRC by 6 July after the tax year ends. Benefits can instead be reported and taxed through payroll, which many employers already do voluntarily. Mandatory payrolling was originally announced for April 2026 but has been deferred: it now begins on 6 April 2027 for cars, vans, fuel and medical benefits, with most remaining benefits from 6 April 2028, and employer-provided loans and accommodation staying outside the mandate for now. For 2026/27, P11D reporting therefore still applies to benefits that are not payrolled.
PSC (Personal Service Company)
A commonly used term for a limited company through which an individual provides their personal services, often a company with a single director-shareholder. The IR35 and intermediaries rules can apply where an individual provides services through such an intermediary, though those rules are not limited to any particular company structure.
R–Z
RTI (Real Time Information)
Real Time Information is HMRC's payroll reporting system. Employers normally submit payroll information to HMRC electronically on or before each payday. This applies to a company operating a one-director payroll as well as to larger employers.
S455 tax
A Corporation Tax charge on certain loans and benefits made by close companies to participators, which covers many director/shareholder loans, where the balance is still outstanding nine months and one day after the end of the accounting period. For loans made or benefits conferred on or after 6 April 2026 the rate is 35.75%; earlier loans keep the rate in force when they were made. Relief can generally be claimed when the loan is repaid, released or written off, subject to the rules and to the timing of the claim.
Substitution
A genuine contractual right to provide a substitute to perform the work. A genuine right that could actually be exercised in practice can be an important indicator against employment status, but it is only one factor in the overall IR35 and employment-status assessment.
Supervision, Direction & Control (SDC)
The extent to which the client can control how, when and where the work is performed. A high degree of client control can point towards employment status, while genuine autonomy may point the other way, but control is only one factor in the overall employment-status and IR35 assessment.
Umbrella company
A company that employs you and handles payroll, PAYE and National Insurance, commonly used for temporary assignments and for engagements where an intermediary such as a contractor's own limited company is not being used. Your pay is subject to the normal employment tax rules, and the umbrella's fees and the contractual payment structure are worth understanding when comparing take-home pay.
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