Taxation Vocabulary in English

Income tax is a tax on the money you earn from work, savings, or a pension, and it funds general government spending such as schools, roads, and defence. National insurance is a separate compulsory payment made by workers and employers that goes specifically towards state benefits, including the State Pension and certain other support. Although both are taken from your wages, they are calculated using different rules and thresholds, so you may pay one without paying much of the other.

A personal allowance is the amount of income you are allowed to earn each year before you have to pay any income tax. In the UK, everyone is normally entitled to a tax-free personal allowance, and only the income above that figure is taxed. If you earn less than your allowance in a tax year, you usually pay no income tax at all. The allowance can be reduced for very high earners, so the exact amount depends on your total income.

A return is an official form on which you report your income and work out how much tax you owe. In the UK this is done through the self-assessment system. Most employees do not need to file one because their tax is collected automatically through PAYE. However, self-employed people, company directors, landlords, and those with higher or untaxed income usually must register for self-assessment and submit a return to HMRC each year, normally by the end of January.

A tax bracket is a range of income that is taxed at a particular percentage, while the rate is the percentage itself. As your income rises, the part of it that falls into a higher bracket is taxed at a higher rate, but the lower part keeps its lower rate. This is why moving into a higher bracket does not mean all of your income is suddenly taxed more — only the portion within that bracket is.

VAT, short for Value Added Tax, is a tax added to the price of most goods and services in the UK. It is usually included in the price you see in shops, so you pay it without noticing it as a separate charge. Businesses collect VAT on behalf of the government and pass it on to HMRC. Some items, such as most food and children's clothing, are charged at a reduced rate or zero rate, which is why not everything carries the same amount of VAT.

A rebate is money returned to you because you have paid more tax than you actually owed. This can happen if too much was taken from your wages through PAYE, if you stopped working part-way through the year, or if you were owed tax relief you had not yet claimed. When HMRC works out that you have overpaid, it sends back the difference. It is the opposite of a tax bill, where you owe extra money to the government.

Taxable income is the part of your income on which you actually have to pay tax, after your allowances and certain deductions have been taken off. For example, if you earn a salary but have a personal allowance and pay into a pension, your taxable income is lower than your total earnings. Working out your taxable income correctly is important, because it is the figure used to calculate your final tax liability.

PAYE, which stands for Pay As You Earn, is the system most UK employees use to pay their income tax and national insurance. Instead of paying a large bill at the end of the year, your employer deducts the right amount from each pay packet and sends it to HMRC on your behalf. This withholding of tax at source means that, for many people, their tax is paid in full automatically and they never have to complete a return.

Capital gains tax is a tax on the profit you make when you sell or dispose of something that has gone up in value, such as shares, a second home, or valuable possessions. You are taxed on the gain — the difference between what you paid and what you sold it for — rather than on the full amount you receive. There is usually a tax-free exemption each year, so only gains above that limit are taxed.

The most effective way is to link each word to a real document or situation. When you read your payslip, notice the words for each deduction, such as income tax and national insurance. When a letter arrives from HMRC, look up any term you do not recognise. Practise the 20 words on this page with Flash Cards on LexFizz, then test yourself with the Quiz. Connecting the vocabulary to tasks you actually face, such as checking a tax code or filing a return, helps the words stick far faster than memorising a list.