Cloud accounting picks up its own vocabulary fast, and a lot of it is HMRC-specific. This glossary is a quick reference for small business owners, with each definition written for a UK audience. We’ve kept the wording plain so non-accountants can follow it, while staying accurate enough for an accounting professional to share with a client. Each Xero UK term covers what it means, why it matters, and where it links into the wider Xero system, with the legal requirement called out where one applies. If you’d rather speak to an expert than read a glossary, we’re happy to help.
Jump to a letter: A · B · C · D · E · F · G · H · I · J · M · O · P · Q · R · S · T · V · X
A
Accruals basis
Accounting method where income and expenses are recorded when they’re earned or incurred, not when cash actually moves. Most UK limited companies must use the accruals basis for statutory accounts. Xero handles accruals automatically once you post bills and invoices.
Accounts payable
Money your business owes to suppliers for goods or services received but not yet paid for. In Xero this lives under “Bills to pay”. Tracking accounts payable accurately is what stops cashflow surprises.
Accounts receivable
The opposite side: money owed to you by customers for invoices you’ve sent but haven’t been paid for yet. Xero’s “Invoices owed to you” report and the dashboard widget make chasing this much easier than spreadsheets.
Annual return
Now called the confirmation statement. A yearly filing every UK limited company submits to Companies House confirming director details, registered office and shareholder information. Separate from the annual accounts.
API (Application Programming Interface)
The behind-the-scenes connection that lets two pieces of software talk to each other. Xero’s API is what makes its 1,000+ integrations possible: Stripe collecting payments, Dext capturing receipts, Shopify pushing sales. You don’t see it as a user, but everything connected to your Xero file uses it.
Auto-enrolment (workplace pension)
The legal duty for UK employers to enrol eligible workers into a pension scheme and contribute a minimum percentage. In force since 2012; minimum total contribution is currently 8% of qualifying earnings (3% employer, 5% employee). Xero Payroll automates the assessment, enrolment letters and re-enrolment cycle.
B
Bank feeds
A direct, secure connection between your business bank account and Xero. Transactions arrive in your Xero ledger automatically, usually overnight, so you reconcile rather than retype. UK banks supported include Barclays, HSBC, NatWest, Lloyds, Santander, Starling, Monzo, Tide and most challenger banks.
Bank reconciliation
Matching the transactions on your bank feed to invoices, bills and other entries in Xero so the books and the bank agree. Reconciling weekly (or daily for higher-volume businesses) is the single best habit for accurate accounts. See our deeper guide on bank reconciliation in Xero.
Basis period
The period of profit a sole trader or partner is taxed on for a given tax year. From 2024-25 HMRC moved to the tax-year basis (6 April to 5 April), aligning self-employed reporting with the tax year. Important for anyone preparing for Making Tax Digital for Income Tax.
Bookkeeping
The day-to-day recording of every financial transaction: sales, purchases, expenses, payroll postings, bank movements. Modern bookkeeping happens inside cloud software like Xero rather than ledgers or spreadsheets. We run a fixed-fee Xero bookkeeping service if you’d rather not do it yourself.
Budget
Your planned income and expenditure for a future period, usually the financial year. Xero’s Budget Manager (Reports > Budget Manager) handles monthly budgets and actual-vs-budget reports. For rolling forecasts and scenario planning, Xero add-ons like Float, Fathom or Spotlight Reporting do more.
Bridging software
A small piece of software that takes data from a non-MTD source (typically an Excel spreadsheet) and submits it to HMRC through the MTD VAT API. Useful for businesses still on spreadsheets while they transition. HMRC counts bridging as compliant only if there are digital links from the source data through to the submission.
C
Cash basis
An alternative to the accruals basis, available to most sole traders and small partnerships under the VAT threshold. Income and expenses are recorded only when cash changes hands. Simpler, but less informative than accruals for managing a growing business.
Cloud accounting
Accounting software that runs in your browser rather than on a single PC. Your data lives on the provider’s servers (with backups), so you and your accountant can both log in from anywhere. Xero, QuickBooks Online and FreeAgent are the main UK cloud accounting packages. Compare options in our Xero vs QuickBooks guide.
Companies House
The UK government registrar of companies. Every UK limited company files annual accounts and a confirmation statement with Companies House. They also hold the public register of directors, shareholders and registered offices.
CIS (Construction Industry Scheme)
HMRC scheme that requires contractors in construction to deduct tax (typically 20%) from payments to subcontractors and pay it to HMRC. Xero handles CIS deductions, statements and monthly returns through the Xero CIS module.
Corporation tax
The tax UK limited companies pay on their profits. The main rate is 25% on profits above £250,000, with a small profits rate of 19% for profits up to £50,000 and marginal relief between. Filed via a CT600 return with HMRC, due 12 months after year-end (payment due 9 months and 1 day after year-end).
CIS verification
Before a contractor pays a subcontractor under the Construction Industry Scheme, they must verify the subcontractor with HMRC to find out the correct deduction rate (gross, 20%, or 30%). Xero’s CIS module runs the verification call and stores the result against the subcontractor record.
Chart of accounts
The full list of every account (income, expense, asset, liability, equity) used to record transactions in your books. Xero ships with a default UK chart for limited companies, sole traders and charities, which you can adapt. A clean chart of accounts is the foundation of useful management reports.
Class 2 NICs
National Insurance for the self-employed earning above the Small Profits Threshold. From 2024-25 most sole traders no longer have to pay Class 2 to maintain their state pension entitlement, but voluntary payments are still possible for those below the threshold who want to keep contribution years.
Class 4 NICs
National Insurance paid by the self-employed on profits above the Lower Profits Limit. Charged alongside Income Tax through Self Assessment. The rates and thresholds change every tax year, so always check HMRC’s current figures when calculating a forecast.
D
Digital records
Under Making Tax Digital, businesses must keep their accounting records in digital form, in software, with a digital link between your records and HMRC. Paper-and-spreadsheet bookkeeping no longer satisfies HMRC for VAT-registered businesses, and from April 2026 the same will apply to most landlords and self-employed people earning over £50,000.
Direct Debit
An automatic recurring payment authorised by your customer (or set up with a supplier). In Xero you can collect Direct Debits from customers using add-ons like GoCardless or Stripe, which sit inside the Xero invoice flow.
Dividend
A distribution of company profits to shareholders. Dividends are paid out of after-tax profits, recorded as a debit to retained earnings in your accounts, and taxed on the shareholder personally (above the £500 dividend allowance for 2025-26). Director-shareholders typically take a mix of salary and dividends to manage their personal tax bill.
Director’s loan account (DLA)
The running record of money owed between a limited company and its director (in either direction). If the company owes the director, it’s a credit balance; if the director owes the company more than £10,000 at any point, there are tax consequences (Section 455 charge, benefit-in-kind on the loan). Xero handles a DLA as a balance sheet account.
Dividend allowance
The tax-free amount of dividend income an individual can receive each tax year before Income Tax applies. The 2025-26 allowance is £500 (down from £2,000 a few years ago). Above this, dividend tax rates of 8.75%, 33.75% and 39.35% apply depending on the income tax band the dividend falls in.
E
EOPS (deprecated)
End of Period Statement. Originally part of the proposed Making Tax Digital for Income Tax design. HMRC dropped EOPS as a separate step in the simplified MTD ITSA model: under the current rules, you submit four quarterly updates and one Final Declaration per tax year per income source.
Expense claims
The process for staff (or directors) to log out-of-pocket business expenses and get reimbursed. Xero Expenses lets users snap receipts on the mobile app, the bookkeeper approves them, and the reimbursement runs alongside payroll. Charged separately by Xero (per active user, per month).
EPS (Employer Payment Summary)
A monthly payroll submission to HMRC that reports adjustments to your PAYE liability: statutory pay recovery (SMP, SPP, SAP, ShPP, SPBP), CIS deductions suffered, apprenticeship levy and Employment Allowance claims. Submitted alongside or instead of the FPS, depending on the month.
F
Final Declaration
Under Making Tax Digital for Income Tax, the once-a-year submission that confirms your total taxable income (across all sources) and finalises your tax liability for the year. Replaces the Self Assessment tax return for those inside MTD ITSA. Due by 31 January following the end of the tax year.
FRS 102 (UK GAAP)
The Financial Reporting Standard applicable in the UK and Ireland. The default UK accounting framework for medium-sized and large private companies, charities and pension schemes. Smaller companies usually qualify for FRS 105 (the micro-entities standard). Xero supports either, with the layout chosen at year-end by your accountant.
Functional compatible software
HMRC’s term for software that meets the Making Tax Digital requirements: keeping digital records, preserving them, and sending the data to HMRC through their API. Xero is functional compatible software for VAT and is on HMRC’s published list for MTD ITSA.
FPS (Full Payment Submission)
The core RTI return employers send HMRC every time they pay employees. The FPS reports gross pay, tax, National Insurance, student loans and pension contributions per employee. Late or missing FPS submissions trigger automatic HMRC penalties.
FY (financial year)
The 12-month period a business uses for its accounts. UK limited companies pick their year-end (often 31 March or 31 December), while sole traders normally align with the tax year (6 April to 5 April) under the new MTD rules. Confusingly, “financial year” can also refer to the government’s fiscal year (1 April to 31 March) for tax-rate purposes.
G
Gift Aid
UK tax relief that lets registered charities reclaim 25p of tax for every £1 donated by a UK taxpayer. Charities running Xero typically use a Gift Aid add-on (such as Donorfy or KindLink) that posts the claim journals back into Xero.
Government Gateway
The HMRC online portal businesses and individuals use to manage their tax accounts. You’ll use a Government Gateway ID to authorise Xero to file VAT and Income Tax returns under Making Tax Digital. Keep the credentials safe; you can’t easily transfer them.
H
HMRC
His Majesty’s Revenue and Customs. The UK tax authority responsible for collecting tax (Income Tax, Corporation Tax, VAT, NI, PAYE), administering benefits and enforcing tax law. All MTD submissions go through HMRC’s API.
HMRC-recognised software
Software listed on HMRC’s published register as compliant with their submission requirements. For MTD VAT and MTD ITSA, the software must be on the recognised list before you can use it to file. Xero is recognised for VAT and Income Tax. See our MTD guide for the full picture.
I
Income Tax Self Assessment (ITSA)
The system HMRC uses to collect Income Tax from people who don’t pay it through PAYE: the self-employed, landlords, company directors with untaxed income, and anyone with income over £150,000. Currently filed annually via a Self Assessment return; gradually moving to quarterly digital filing under MTD ITSA.
Integrations
Connections between Xero and other software: payment processors (Stripe, GoCardless), e-commerce platforms (Shopify, WooCommerce), receipt capture (Dext, Hubdoc), CRMs, payroll, inventory, project management. Xero’s app marketplace lists 1,000+ UK-supported integrations and is the broadest in cloud accounting.
Inventory management
Tracking stock levels, costs and valuations. Xero has built-in inventory for simple needs (track quantity and average cost); growing businesses usually add an inventory app like Unleashed, Cin7 or DEAR. See our guide to managing inventory in Xero.
Invoice
A bill you send a customer requesting payment, or one you receive from a supplier. Xero treats sales invoices and supplier bills separately. Sales invoices can be branded, sent by email, paid via online links, and chased automatically with reminders.
IR35 (off-payroll working)
The set of HMRC rules that decide whether a contractor working through their own limited company is, in practice, employed by their client. If a contract sits “inside IR35”, income tax and NI must be deducted as if it were employment. Since 2021 most medium and large private-sector clients (and all public-sector ones) are responsible for making the IR35 determination.
J
Journal entries
Manual postings to the ledger that don’t fit the normal sales/purchase/bank workflow. Used for accruals, prepayments, depreciation, payroll, year-end adjustments and corrections. Bookkeepers post most journals; Xero records each one with a date, reference and audit trail.
M
Making Tax Digital (MTD)
HMRC’s programme to move UK tax filing online, with mandatory digital record-keeping and digital links between software and HMRC. Started with VAT in 2019, expanding to Income Tax from April 2026 for the larger self-employed and landlords. Full background in our Making Tax Digital guide.
Making Tax Digital for VAT
The first phase of MTD, mandatory since April 2022 for all VAT-registered businesses regardless of turnover. Returns must be filed using HMRC-recognised software (like Xero) with digital links from the underlying records to the return.
Making Tax Digital for Income Tax (MTD ITSA)
The next phase, starting 6 April 2026 for self-employed individuals and landlords with gross income over £50,000, and from April 2027 for those over £30,000. Requires quarterly digital updates plus a Final Declaration. Xero’s MTD ITSA module is on HMRC’s recognised list.
Multi-currency accounting
Recording transactions in foreign currencies (USD, EUR and so on) and translating them back to sterling at posting and at year-end using daily exchange rates. Xero’s multi-currency feature is on the Established and Ultimate plans, supports 160+ currencies, and handles realised and unrealised gains/losses automatically.
O
Online VAT registration
Registering for VAT through HMRC’s online service (gov.uk). Most businesses register voluntarily once they expect to pass the £90,000 threshold, or compulsorily once they have. The certificate, including your VAT number and effective date, usually arrives within 30 days. From there, every return goes through MTD-recognised software like Xero.
P
Payroll
The process of paying staff: calculating gross pay, tax, National Insurance, pension contributions and student loan deductions, then submitting Real Time Information (RTI) to HMRC. Xero Payroll is built in (extra fee per employee, per month), or you can run payroll separately and post journals into Xero.
PAYE (Pay As You Earn)
The HMRC system for collecting Income Tax and National Insurance from employees’ wages at source. Employers run PAYE through their payroll software and submit RTI returns each pay period. Late submissions and missed payments trigger automatic HMRC penalties.
Permissions (Xero users + roles)
Xero lets you control what each user can see and do: Adviser, Standard, Read Only, Invoice Only, plus add-ons for Payroll Admin, Reports and Manage Users. Use the lowest level needed for the job – bookkeepers don’t usually need Adviser, sales staff often only need Invoice Only.
Purchase order
A formal document issued to a supplier confirming an order before goods or services are delivered. Xero generates purchase orders, converts them to bills on receipt, and supports approval workflows. See our guide on managing purchase orders in Xero.
Pension auto-enrolment
The UK rule (in force since 2012) requiring employers to enrol eligible workers into a workplace pension and contribute a minimum percentage. Xero Payroll handles assessment, enrolment, contributions and re-enrolment, and integrates with The People’s Pension, NEST, Smart Pension and others.
P11D (benefits-in-kind)
The annual return employers file with HMRC reporting non-cash benefits given to directors and employees: company cars, private medical, interest-free loans over £10,000, and so on. Due 6 July following the tax year. The employee pays Income Tax on the cash equivalent; the employer pays Class 1A NI.
P45
The leaver’s tax form. When an employee leaves, the employer issues a P45 showing pay and tax to date so the next employer can pick up the right tax code. Generated automatically in Xero Payroll once you process a leaver date.
P60
The year-end summary every employer must give each employee still on payroll on 5 April, showing total pay and deductions for the tax year. Used by employees to claim tax refunds, support mortgage applications, and complete Self Assessment if needed. Xero produces P60s as PDFs after the final pay period.
Personal Allowance
The amount of income an individual can earn each tax year before paying Income Tax. The standard 2025-26 Personal Allowance is £12,570 and is reduced by £1 for every £2 of income above £100,000. Affects payroll tax codes, Self Assessment, and dividend planning for owner-managed businesses.
Q
Quarterly update (MTD)
Under MTD ITSA, the digital summary of business income and expenses you’ll send HMRC every three months from each business or property income source. Five submissions per year per source: four quarterly updates plus a Final Declaration.
Quotes (Xero invoicing)
An estimate sent to a customer before work starts. Xero quotes can be accepted online by the customer, then converted to a sales invoice in one click once the work is done. Useful for service businesses and trades.
R
Reconciliation
The process of matching one set of records to another. In Xero, bank reconciliation is the daily one (matching the bank feed to your ledger), but you’ll also reconcile control accounts, supplier statements, payroll liabilities and stock at year-end.
Recurring invoices
Invoices set up to send automatically on a schedule (monthly, quarterly, annually). Xero saves the template and emails the invoice on the due date, ideal for retainer clients, subscription businesses, and rent.
R&D tax credit
UK tax relief for companies undertaking qualifying research and development. The merged scheme (from April 2024) gives a 20% above-the-line credit; loss-making R&D-intensive SMEs get an enhanced rate. Claims sit alongside the CT600 corporation tax return; Xero data feeds the calculation.
RTI (Real Time Information)
HMRC’s payroll reporting system: employers submit pay and deduction data on or before each pay date through their software, rather than once a year. RTI returns are the FPS and EPS. Xero Payroll handles RTI submissions automatically once you’re set up with HMRC online services.
S
SaaS accounting
Software-as-a-Service accounting, meaning you pay a subscription fee (monthly or annually) for cloud-based access rather than buying a perpetual licence. Xero, QuickBooks Online and FreeAgent are all SaaS. The model spreads the cost and includes upgrades, but you’re paying every month forever.
Self Assessment
The current annual UK Income Tax return for the self-employed, landlords, higher earners and others outside PAYE. Filed by 31 January following the tax year. Being progressively replaced by MTD ITSA from April 2026.
Self-employed
An individual running their own business as a sole trader or partner, taxed on their share of profits via Self Assessment. Self-employed people are inside MTD ITSA from April 2026 if their gross trading + property income is over £50,000.
SORP (Charities)
Statement of Recommended Practice. The accounting framework UK charities follow for their financial statements, sitting on top of FRS 102. Xero supports charity accounting with the help of an add-on like KindLink or specific chart-of-accounts templates. See our notes on Xero for non-profits.
SaaS (Software as a Service)
Software you rent on a subscription basis and access through a browser, rather than installing on a single machine. Xero, QuickBooks Online, Dext and most modern accounting tools are SaaS. The trade-off: you pay every month, but updates, hosting and backups are included and you can log in from anywhere.
T
Tax codes
Two meanings. (1) HMRC’s PAYE codes (1257L, BR, K-codes) used in payroll to calculate how much Income Tax to deduct. (2) VAT tax rates set up in Xero (20% standard, 5% reduced, 0% zero-rated, exempt, no VAT). Both matter, and confusing them is a common bookkeeping error.
Tracking categories
A Xero feature that adds a second dimension to your reporting: department, location, project, fee earner. Two tracking categories per organisation, with up to 100 options each. Powerful for management reporting without complicating the chart of accounts. See our guide.
Trial balance
A list of every account balance in your ledger at a point in time, with debits and credits totalled. The trial balance is the starting point for preparing financial statements and the first thing your year-end accountant pulls from Xero.
Two-factor authentication (2FA)
An extra security layer on top of your password, usually a code from an authenticator app or a text. Xero requires 2FA for every login – a regulatory requirement under the Australian privacy regime that applies to all Xero users worldwide. Always use an app-based authenticator (Google Authenticator, Authy, 1Password) over SMS where possible.
V
VAT (Value Added Tax)
UK consumption tax on most goods and services. Standard rate is 20%; some goods (children’s clothing, most food) are zero-rated; some (domestic fuel) are 5%. Mandatory registration once turnover exceeds £90,000 in any 12 months (2025-26 threshold).
VAT return
The summary of VAT charged and paid you submit to HMRC, usually quarterly. Under Making Tax Digital, every UK VAT return is filed from compatible software like Xero. Submissions are due one month and seven days after the period end.
X
Xero
The cloud accounting platform we specialise in. Founded in New Zealand in 2006, listed on the ASX, used by 4 million+ subscribers worldwide and around 700,000 in the UK. Read more on our homepage or our deeper Xero bookkeeping software guide.
Xero Advisor Certification
The free certification Xero offers to accountants and bookkeepers, taken through Xero Central. Two paths: Xero Advisor Certified and the more advanced Xero Migration Certified. Required before a practice can apply for partner status. Our Xero bookkeeping course guide covers what’s involved.
Xero Gold Partner
A practice that has earned the Gold tier in Xero’s partner programme by supporting a meaningful number of Xero clients and maintaining adviser certifications. JacRox is a Xero Gold Partner and the cloud accounting arm of Jack Ross Chartered Accountants (est. 1948).
Still have questions?
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