Taxation Vocabulary Quiz
12 multiple-choice questions on taxation and tax vocabulary: income tax, VAT, allowances, deductions and tax-return terms. B2–C1 level.
Taxation Vocabulary — FAQ
Income tax is a direct tax charged on the money a person earns, such as wages, salary, pension or self-employed profit. VAT (Value Added Tax) is an indirect tax added to the price of most goods and services — currently 20% in the UK — and is paid by the consumer at the point of sale. In short, income tax is taken from what you earn, while VAT is added to what you spend.
The personal allowance is the amount of income you can earn in a tax year before you have to pay any income tax. In the UK the standard personal allowance is £12,570 for most people. You only pay income tax on earnings above this threshold. The allowance can be reduced for very high earners and may change from year to year, so it is worth checking the current figure on GOV.UK.
HMRC stands for His Majesty's Revenue and Customs. It is the UK government department responsible for collecting taxes — including income tax, VAT, National Insurance and corporation tax — and for paying out certain benefits and tax credits. HMRC also processes tax returns, issues tax refunds and enforces tax law. If you owe tax, claim a rebate or file a self-assessment return, you deal with HMRC.
A tax deduction is an amount, usually an allowable expense, that is subtracted from your income before tax is calculated, so you are taxed on a smaller figure. A tax relief is a measure that reduces the amount of tax you owe, often to encourage a particular activity — for example relief on pension contributions or charitable giving. Both lower your final bill, but a deduction shrinks your taxable income, whereas a relief directly reduces the tax due.
A tax return is a form on which you report your income, gains and certain expenses to HMRC so that your tax can be calculated. In the UK it is filed through Self Assessment. You usually have to file one if you are self-employed, a company director, a landlord, a high earner, or if you have untaxed income such as savings, dividends or foreign earnings. Most employees taxed entirely through PAYE do not need to file a return.
PAYE stands for Pay As You Earn. It is the UK system by which employers deduct income tax and National Insurance from employees' wages before paying them, and send these amounts directly to HMRC. Because tax is collected gradually throughout the year, most employees do not need to file a tax return. Your tax code tells the employer how much tax-free pay you are entitled to under PAYE.
Capital gains tax (CGT) is a tax on the profit you make when you sell or dispose of an asset that has increased in value — for example shares, a second home or a valuable item. You are taxed on the gain (the difference between what you paid and what you sold it for), not the whole amount received. There is an annual tax-free allowance, and your main home is usually exempt under private residence relief.
Tax avoidance means using legal methods to reduce the amount of tax you pay — for example saving in an ISA or claiming legitimate allowances and reliefs. Tax evasion is illegal: it means deliberately not paying tax you owe, such as hiding income or falsifying records. Avoidance is within the law (though aggressive schemes may be challenged), while evasion is a crime that can lead to fines or imprisonment.
A tax rebate, also called a tax refund, is money that HMRC pays back to you when you have paid more tax than you actually owed. This can happen if you were on the wrong tax code, stopped work part-way through the year, or had allowable expenses that were not taken into account. You may receive a rebate automatically, or you may need to claim it through HMRC, often after the tax year has ended.
Useful UK tax abbreviations include: VAT (Value Added Tax), NI (National Insurance), CGT (Capital Gains Tax), PAYE (Pay As You Earn), ISA (Individual Savings Account — a tax-free savings or investment account), SA (Self Assessment, the system for filing a tax return), and UTR (Unique Taxpayer Reference, the ten-digit number HMRC uses to identify you). You may also see IHT (Inheritance Tax) and NIC (National Insurance Contributions).