A glossary of important terms for contractors

Saturday, 26 May 2012 02:45

Contractors have a lot to think about

Contractors have a lot to think about

Contractors have a lot to think about

If you are new to the world of contracting, there are certain terms and phrases that you need to understand.
Whether you are interested in working under an umbrella company or setting up your own limited company, it is important that you are aware of the most common terms and what they mean.

Accountancy services provider

Companies staffed by accountants that provide various services to help limited company contractors in the running of their businesses. Such organisations can assist with payroll processing, tax returns, data entry and other financial services.


BACS stands for Banks Automated Clearing System and is an automated payment method.

Book keeping

The term used to refer to the recording of financial accounts of your business.

Companies House

The UK's Registrar of Companies. If you intend to set up a limited company, you will need to register with Companies House.

Corporation tax

A tax on the taxable profits of limited companies and other organisations. Taxable profits include trading profits and capital gains.


A dispensation is a notice from HMRC that removes the requirement for umbrella companies to report expenses and benefits at the end of year on forms P9D and P11D.


Expenses refer to costs that can be deducted if they were incurred as a direct result of your contract.

Gross pay

Your earnings before National Insurance Contributions, PAYE and other deductions.

HM Revenue and Customs

Non-ministerial department responsible for ensuring companies comply with current legislation and for collecting tax revenue on behalf of the government.

Income tax

A tax on your income during a tax year. Taxable income includes earnings from employment, investments and profits.


A bill sent to your client containing details of the hours you worked, your rate of pay and other important details. Invoices sent from limited companies must include additional information, such as the full company name, any business name used in your business and an address where legal documents can be delivered.


The name used to refer to a piece of tax legislation that came into force in 2000 to counter avoidance of tax through 'disguised employment'.

Limited company

A company registered in such a way as to ensure its owners have limited liability.

Limited liability

A feature of running a limited company that means the shareholder's financial liability is limited to the value of their investment in the company. It means the shareholder's assets are not at risk should the company fold.

Net pay

Your income after deductions are made for National Insurance, PAYE and other statutory payments.


National Insurance Contributions.


The expenses and benefits form from HMRC providing details of any expenses payments, benefits and facilities provided to each employee or director earning more than £8,500 per annum.


Pay-as-You-Earn system used by HMRC to collect income tax and NICs from employees' pay as they earn it.


A financial record of salaries, wages, bonuses and deductions for employees.


A form showing your income, capital gains, tax allowances and relief.


A sheet used to record the number of hours or days worked.

Umbrella company

Companies that contain one or more contractors who are employees of the company. Contractors receive a salary and pay NICs and PAYE on their earnings.

This list, while not exhaustive, contains some of the most common terms you will come across in your career as a contractor.
If you choose to become an employee of an umbrella company , you will not have to concern yourself with many of them, however, those intending to set up a limited company will have to bear them in mind if they choose not to engage an accountancy services provider to handle the administrative side of their affairs.



Finance articles

  • How to form a limited company

    If you are confident that you will fall outside of the IR35 regulations and would like to minimise your tax burden, then you should be looking to operate as a limited company contractor. But how do you go about setting up a limited company?

  • Umbrella vs limited company – which is right for you?

    If you're looking to become a contractor, then you need to consider the two main options open to you – operating as a limited company or using an umbrella company. However, you must also be aware that this decision may be taken away from you.

  • How does the 24-month rule impact those utilising umbrella companies?

    The 24-month rule is something most people have come across, but many will admit they do not fully understand what it is. However, it is particularly important and must be considered when submitting paperwork to HM Revenue and Customs (HMRC).

  • What allowable expenses are available for the self-employed?

    Working for yourself makes for an incredibly exciting career choice. Not only do you get the chance to set your own hours and choose the projects that excite you the most, but it enables you to operate in a highly tax-efficient manner. Being self-employed also potentially allows you to receive a significantly higher income in comparison to doing the same kind of work as a permanent full-time employee, most notably as you could off-set tax against the expenses that you incur.

  • How the forthcoming Real Time Information system will affect reporting payroll data

    Being a contractor gives professionals the freedom to select their own working hours and choose the projects they work on; however, with that comes the need to look after their own payroll and tax issues. With HM Revenue and Customs (HMRC) set to introduce a new payroll reporting system later this year, now is the time for professionals to make certain they are aware of the changes this will entail.

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