UK Tax Glossary

Clear, plain-English definitions of 25 key UK tax terms. From PAYE and Personal Allowance to fiscal drag and inheritance tax — understand the language of UK taxation.

All figures are for the 2025/26 tax year unless otherwise stated.

A

Additional Rate (45%)

The 45% income tax rate applied to taxable income above £125,140.

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B

Basic Rate (20%)

The 20% income tax rate applied to taxable income between £12,571 and £50,270.

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C

Capital Gains Tax (CGT)

A tax on the profit you make when you sell or dispose of an asset that has increased in value.

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Class 2 National Insurance

A flat-rate NI contribution paid by self-employed people — £3.45 per week in 2025/26.

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Class 4 National Insurance

A profit-based NI contribution paid by self-employed people — 6% on profits between £12,570 and £50,270.

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D

Dividend Allowance

The first £500 of dividend income each year is tax-free, regardless of your tax band.

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F

Fiscal Drag

The effect of frozen tax thresholds pushing more people into higher tax bands as wages rise with inflation.

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H

Higher Rate (40%)

The 40% income tax rate applied to taxable income between £50,271 and £125,140.

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I

Inheritance Tax (IHT)

A tax charged at 40% on the value of an estate above the nil rate band when someone dies.

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L

Land and Buildings Transaction Tax (LBTT)

Scotland's equivalent of stamp duty, charged on property and land purchases.

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Land Transaction Tax (LTT)

Wales's equivalent of stamp duty, charged on property and land purchases.

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M

Marriage Allowance

Transfer £1,260 of your Personal Allowance to your spouse or civil partner to save up to £252 per year.

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N

National Insurance

A UK tax on earnings and self-employed profits that funds the state pension, NHS, and benefits.

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Nil Rate Band

The £325,000 threshold below which no inheritance tax is charged on an estate.

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P

P45

A certificate issued by your employer when you leave a job, showing your pay and tax to date.

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P60

An end-of-year certificate from your employer showing your total pay and tax deducted.

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PAYE (Pay As You Earn)

The system HMRC uses to collect income tax and National Insurance directly from employees' wages.

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Pension Annual Allowance

The maximum amount you can contribute to pensions each year with tax relief — currently £60,000.

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Personal Allowance

The amount of income you can earn each year before paying income tax — currently £12,570.

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R

Residence Nil Rate Band (RNRB)

An additional £175,000 IHT allowance when you leave your home to direct descendants.

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S

Salary Sacrifice

An arrangement where you give up part of your salary in exchange for a non-cash benefit, saving tax and NI.

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Self Assessment

The process of filing your own tax return with HMRC, typically required for self-employed people and those with complex tax affairs.

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Stamp Duty Land Tax (SDLT)

A tax paid when buying property or land in England and Northern Ireland.

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Student Loan Plan 2

The repayment plan for post-2012 English and Welsh student loans, with repayments at 9% above £27,295.

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T

Tax Code

An HMRC code (e.g. 1257L) that tells your employer how much tax-free income you are entitled to.

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