Freelancer glossary

Accruals basis

Recording income when you invoice it and costs when you incur them, rather than when the money moves. The default for larger businesses, and the basis most freelancers end up on.

Allowable expense

A cost incurred wholly and exclusively for the business, which therefore reduces taxable profit. Where a cost has a private side you claim the business proportion, not the whole.

Annual Investment Allowance

The relief that lets you deduct the full cost of qualifying equipment in the year you buy it, up to £1,000,000 a year. For a freelancer it means capital purchases behave much like ordinary costs.

Balancing charge

What happens when you sell something you claimed capital allowances on. The proceeds come back into profit, capped at what you originally claimed, so you can never be charged on more relief than you had.

Basis period

The period of trading profit taxed in a given tax year. Sole traders now align to the tax year ending 5 April, which removed the overlap profits the old rules created.

Billable day

A day you can actually invoice. A normal freelance year has about 167 of them out of 261 weekdays, once holiday, sickness and the work of finding work are taken out.

Break even

The level of fees that covers your costs and the tax on the profit, before you have earned anything to live on. For a freelancer it is measured in billable days rather than in units.

Cash basis

Recording income when it is received and costs when they are paid. Simpler, and it means you are not taxed on invoices that have not been paid yet.

Class 2 National Insurance

The old flat weekly contribution for the self employed. It no longer has to be paid to build a qualifying year, though it can still be paid voluntarily where profits are low.

Class 4 National Insurance

The National Insurance the self employed pay on profit. It starts at the same point as income tax and drops to a lower rate above £50,270, which is why the total rate falls rather than rises at that point.

Client profitability

Fee divided by every hour a client takes, billed or not. The biggest client by fee is often not the best one by this measure, and only the hours reveal it.

Corporation tax

The tax a company pays on its profit, before anything is taken out. Nineteen per cent to £50,000, twenty five per cent from £250,000, with a marginal rate of 26.5 per cent in between.

Deemed employment payment

Inside IR35, the amount treated as employment income. Where the assignment rate is the cost to the fee-payer, employer National Insurance comes out of it first, so the rate quoted is more than the pay received.

Digital link

A transfer of figures between systems with no manual step. An export and import is one. Reading a number off a screen and typing it in is not, however careful you are.

Director's loan account

The running record of money moving between you and your own company. Overdrawn nine months and a day after the year end and the company pays a tax charge on the balance.

Dividend

A distribution of company profit to shareholders. It can only be paid out of distributable profit, and it needs a minute and a voucher to be a dividend rather than a withdrawal.

Dividend allowance

The first £500 of dividends taxed at nil. Above it the rates are 10.75 per cent, 35.75 per cent and 39.35 per cent, which is higher than most comparisons written a few years ago assume.

Effective rate

What you actually earn per hour worked, including every unbilled hour. It is always lower than your headline rate, and the gap is the honest measure of how a client is treating you.

Employer National Insurance

What an employer pays on top of a salary: 15 per cent of pay above £5,000. It is the reason an employed equivalent costs far more than the salary, and the reason an inside IR35 rate is worth less than the same number outside.

Final declaration

Under Making Tax Digital, the year-end submission that replaces the Self Assessment return. It follows the fourth quarterly update and is where reliefs and other income go in.

Flat rate scheme

A VAT scheme for businesses under £150,000 of turnover: you pay a flat percentage of gross takings and stop reclaiming input VAT. Most service freelancers are limited cost traders, which makes it worth much less than it looks.

Gross income

What you invoiced, before any costs. It is the figure Making Tax Digital measures, which is why a business with high costs can be in scope years before it expects to be.

IR35

The rules asking whether an engagement through your own company would have been employment if you had been engaged directly. Judged engagement by engagement, not person by person.

Limited cost trader

A flat rate scheme business whose spending on goods is under 2 per cent of turnover, or under £1,000 a year. The flat rate is forced to 16.5 per cent, which removes most of the benefit.

Making Tax Digital for Income Tax

Four quarterly updates and a final declaration in place of one return, from compatible software. It arrives at £50,000 of gross income in 2026, £30,000 in 2027 and £20,000 in 2028.

Marginal relief

The mechanism that eases corporation tax between £50,000 and £250,000 of profit. The effective rate on profit inside that band is 26.5 per cent, higher than the main rate either side.

Mutuality of obligation

Whether the client must offer work and you must accept it. A rolling arrangement with no defined end points towards employment. A defined piece of work that ends does not.

Payment on account

An instalment towards next year's tax, half the last liability, due 31 January and 31 July. None are due if the liability is under £1,000, or if 80 per cent was taxed at source.

Personal allowance

The first £12,570 of income taxed at nil. It is withdrawn by £1 for every £2 of income over £100,000, which creates an effective 60 per cent band up to £125,140.

Professional indemnity insurance

Cover for claims arising from your professional work. Allowable as an expense, and often required by contract before a client will engage you at all.

Qualifying income

The figure that decides whether Making Tax Digital applies: gross income from self employment and property added together, before any allowances or expenses. Not profit.

Quarterly update

A cumulative total of income and expenses for the year to date, filed on 7 August, 7 November, 7 February or 7 May. It is information, not a return, and it carries no payment.

Retained profit

Profit left in a company rather than drawn out. It is the only circumstance in which incorporating reliably beats trading as a sole trader on current rates.

Runway

How long the business keeps going on what is in the bank if no new money arrives. For a freelancer it is the honest measure of how much risk a single late paying client represents.

Simplified expenses

Flat rate claims instead of working out actual costs. For working from home it is £10, £18 or £26 a month depending on hours, with no records of actual cost needed.

Small client

For IR35, a private sector client meeting two of three: turnover not more than £15 million, balance sheet not more than £7.5 million, and not more than 50 employees. If the client is small, your company decides status and carries the risk.

Status Determination Statement

The written decision a medium or large client must give you, with its reasoning. Until it is issued with reasonable care the liability stays with the client.

Statutory interest

What you are entitled to charge on a late commercial debt: base rate plus 8 per cent, together with a fixed sum of £40, £70 or £100 depending on the size of the invoice.

Substitution

Whether you could send a competent replacement at your own cost. A genuine unfettered right is close to decisive for status. A right the client can veto for any reason is worth nothing.

Tax reserve

Money moved aside for tax on the day an invoice is paid. The right percentage is a share of invoices, which is lower than the share of profit people usually quote at themselves.

Temporary workplace

Somewhere you attend for a limited duration or a temporary purpose. Travel there is allowable. Somewhere you attend so regularly it has become your base is not.

Trading allowance

The first £1,000 of trading income, which can be received without registering or paying tax on it. Claim it instead of expenses, not as well.

Utilisation

Billable days as a share of working days. A healthy freelance year is around 64 per cent, and a rate built on a higher assumption than you achieve is wrong by the difference.

VAT threshold

£90,000 of taxable turnover in any rolling twelve months, not a tax year. Crossing it in the middle of a year is normal, which is why the test is worth checking monthly.

Wholly and exclusively

The test an expense must meet to be allowable. It is why entertaining clients never qualifies and why a phone bill is apportioned rather than claimed in full.

Work in progress

Work done and not yet invoiced. It belongs to the year the work was done, so leaving it out understates both the profit and the size of the business.

Working capital

The money tied up in running the business: invoices raised and not paid, less what you owe. Freelancers finance it themselves, which is why long payment terms are a loan you are making rather than an inconvenience.

Year end

5 April for a sole trader, since basis periods aligned to the tax year. Every decision that changes a year's profit has to happen before it, not after.