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
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 — see our key dates page.
Annual Investment Allowance (AIA)
A capital allowance giving 100% tax relief in the year of purchase on qualifying equipment (computers, furniture, tools), up to a generous annual limit — so most contractor equipment comes off profit immediately.
Benefit-in-kind (BIK)
A non-cash perk provided by your company (a company car, an overdrawn director's loan, private medical cover) that's taxable on you personally and reported on a P11D.
Business Asset Disposal Relief (BADR)
Formerly Entrepreneurs' Relief — a reduced capital gains tax rate on qualifying gains when you sell or wind up your company, subject to a lifetime limit. Relevant when closing a company.
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
Tax on your company's profits. For 2026/27, 19% on profits under £50,000, rising through a marginal band to 25% on profits over £250,000.
CT600
The Company Tax Return filed with HMRC, reporting your company's profit and corporation tax. Due 12 months after your year-end (though the tax itself is payable earlier).
D–I
Deemed payment
Where an engagement is caught by IR35, the deemed payment is the amount treated as employment income after allowable deductions — taxed through PAYE, largely wiping out the limited-company tax advantage.
Director's loan account (DLA)
A running record of money moving between you and your company outside salary, dividends and expenses. Going overdrawn can trigger an S455 charge and a benefit-in-kind — see our DLA guide.
Dividend
A distribution of company profit to shareholders, paid after corporation tax. Usually the most tax-efficient way to draw income above a small salary — 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
Rules designed to catch contractors who work like employees but bill through a company. Being "inside" IR35 means employment-level tax; "outside" means you can use the normal salary/dividend approach — see our IR35 guide.
Inside / outside IR35
"Inside" means the engagement falls within IR35 and is taxed like employment. "Outside" means it's genuinely a business-to-business contract, taxed the tax-efficient way.
M–P
Making Tax Digital (MTD)
HMRC's programme requiring digital record-keeping and software-based submissions — already in force for VAT, and phasing in for income tax self-assessment from April 2026 for those over the relevant thresholds.
Marginal relief
The mechanism that eases corporation tax between the £50,000 and £250,000 profit thresholds, producing an effective 26.5% rate on profits in that band. Modelled in our corporation tax calculator.
Mutuality of obligation (MOO)
One of the key IR35 tests — whether the client is obliged to offer work and you're obliged to accept it. A hallmark of employment rather than a business contract.
Payments on account
Advance instalments toward next year's self-assessment bill, due 31 January and 31 July, which make your first tax bill 50% larger than expected — see our payments on account guide.
P11D
The form reporting taxable benefits-in-kind provided to a director or employee during the tax year. Due to HMRC by 6 July after the tax year ends.
PSC (Personal Service Company)
The standard term for a limited company through which a contractor provides their services — typically a single director-shareholder. The structure IR35 was written to address.
R–Z
RTI (Real Time Information)
The system for reporting payroll to HMRC each time you pay yourself, keeping your tax and NI records up to date. Required even for a one-director payroll.
S455 tax
A temporary corporation tax charge (35.75% for 2026/27) on a director's loan left unpaid more than 9 months after year-end. Refunded once the loan is repaid — see our DLA guide.
Substitution
A genuine right to send someone else to do the work in your place. A strong pointer to being outside IR35, because employees can't substitute themselves.
Supervision, Direction & Control (SDC)
How much say the client has over how, when and where you work. High control points toward employment (and inside IR35); genuine autonomy points the other way.
Umbrella company
A company that employs you and runs PAYE on your behalf, used mainly for inside-IR35 engagements. Simpler than running your own company, but without the tax efficiency of an outside-IR35 limited company.
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