Glossary

Plain-English definitions of UK tax terms that come up most often for freelancers and the self-employed. Each entry is sourced from HMRC published guidance and applies to the 2026/27 tax year unless noted.

AIA (Annual Investment Allowance): The allowance lets self-employed people deduct the full cost of qualifying business equipment from their taxable profits in the year of purchase, up to a generous annual cap. Tools, IT equipment, machinery, and most office furniture qualify. Cars have separate rules.
Allowable expense: A cost incurred "wholly and exclusively" for the purposes of your trade. If an expense has any meaningful private benefit, HMRC may disallow it or require you to apportion the business and personal portions. Train fares to client sites are allowable. A suit you also wear to weddings is not.
Capital gains tax (CGT): The tax you pay on the profit when you sell certain assets like shares, second properties, or business assets. For 2026/27 there is a £3,000 annual exempt amount. Gains above that amount stack on top of your income for the year and are taxed at rates that depend on which income tax band the gain falls in.
Class 2 National Insurance: The flat-rate National Insurance contribution self-employed people pay if their profits are above a threshold. Class 2 builds your entitlement to State Pension and certain benefits. Below the threshold, you can pay voluntarily to preserve your contributions record.
Class 4 National Insurance: The percentage-based National Insurance contribution on self-employed profits above a lower threshold, with a different rate kicking in above an upper threshold. Class 4 is the self-employed equivalent of Class 1 employee NI but doesn't build entitlement to as many benefits.
Dividend allowance: The amount of dividend income you can receive each year before dividend tax kicks in. For 2026/27 the allowance sits at a low level after several years of reductions. Dividends above the allowance are taxed at rates that depend on which income tax band they fall in.
Gift Aid: The scheme that lets charities reclaim basic-rate tax on donations from UK taxpayers, and lets higher-rate taxpayers reclaim the difference between higher rate and basic rate through their self-assessment return. Gift Aid donations also extend your basic rate band, which can save tax for people near a band threshold.
HICBC (High Income Child Benefit Charge): A tax charge that effectively claws back Child Benefit when one parent or partner earns above a threshold. The charge is calculated on a sliding scale and is administered through self-assessment. Many people are caught out because Child Benefit goes to one partner but the charge can fall on the other.
HMRC: His Majesty's Revenue and Customs. The UK's tax authority. HMRC publishes the rates, thresholds, and guidance that Numro's tax engine is built from.
Itinerant trade: HMRC's term for a trade where the work itself involves regular travel between sites, like a self-employed lorry driver or a visiting trades person. Itinerant traders have wider scope for claiming subsistence costs than ordinary trades.
Making Tax Digital for Income Tax (MTD for ITSA): The HMRC programme requiring self-employed people and landlords above a turnover threshold to keep digital records and submit quarterly updates to HMRC through MTD-compatible software. The 2026 mandate brings a large number of freelancers and sole traders into scope for the first time.
Payment on Account: An advance payment toward your next year's tax bill, payable in two instalments in January and July. Most self-assessment taxpayers with a bill above a threshold are required to make these payments. They catch many first-time filers off guard because the January payment effectively covers 18 months of tax in one go.
Personal Allowance: The amount of income you can earn tax-free each year. For 2026/27 the standard Personal Allowance is the same as previous recent years. Above a £100,000 income threshold, the allowance tapers away by £1 for every £2 of additional income, which creates an effective 60% marginal tax rate in the taper band.
Personal Allowance taper: The mechanism by which the Personal Allowance reduces for high earners above the £100k threshold. The taper creates a band where each additional pound of income is taxed at 40% on the pound itself and triggers the loss of 50p of tax-free allowance, giving an effective marginal rate of 60%. The taper completes once income reaches £125,140, beyond which there is no Personal Allowance at all.
Self-Assessment: The system through which UK taxpayers with non-PAYE income (or PAYE income above certain thresholds) declare their income and calculate their own tax bill. Returns cover the tax year (6 April to 5 April) and are filed online by 31 January following the end of the tax year.
Self-employed: HMRC's term for someone running their own business as an individual, as opposed to through a limited company. Sole traders are self-employed. Self-employed people pay income tax and Class 2 and Class 4 National Insurance on their profits.
Simplified expenses: The HMRC scheme that lets self-employed people claim flat-rate deductions for vehicle mileage, working from home, and living on business premises, instead of working out actual costs. Useful for keeping records simple, but the actual-cost method can sometimes produce a higher allowable deduction.
Sole trader: The simplest legal structure for running a business in the UK. You're personally responsible for the business's debts and pay tax through self-assessment on the business's profits. Most freelancers operate as sole traders unless they have a specific reason to incorporate as a limited company.
Subsistence: HMRC's term for food and drink consumed during the course of work. The rules are narrow. Routine meals at your normal workplace are not allowable. Food and drink during a genuine business journey (especially overnight or for itinerant trades) generally is.
Tax year: The UK tax year runs from 6 April to the following 5 April. 2026/27 means the tax year starting on 6 April 2026 and ending on 5 April 2027.
Wholly and exclusively: The HMRC test for whether an expense is allowable against trading profits. The cost must be incurred wholly and exclusively for the purposes of the trade. Any meaningful private benefit risks disqualifying the expense entirely, unless the business and private parts can be cleanly separated.