All it means is how inaccurate your speedo is allowed to be. So say you're genuinely doing 40mph then it could legitimately read anything between 40 and 44mph. But it couldn't say that you were doing less than 40 since that would breach the regulations.

Essentially, all mechanical gauges have a degree of inbuilt inaccuracy(usually of plus or minus 10%), and the law allows this to be taken into account - the more accuarate that they were made then the cost would become more and more prohibitively high for the small benefit gained. However, they wouldn't want the speedo to under-read, firstly for the reason you gave above, and secondly from a safety point of view - assuming that a speed limit has been posted beacuse its deemed that thats the safe maximum then it wouldn't be right for someone be thinking that they were safely driving under that limit when they were actually going faster.

Effectively therefore they "rig" the position of the digits on the dial so that even if it was under-reading then you wouldn't see that, it would then display you going at the correct speed you were travelling at, rather than showing you to be slower than what you actually were.