Glossary

Umbrella Company

A ‘mechanism’ or ‘device’ which allows freelance professionals to secure a contract without the need for setting up their own limited company. Most contractors simply do not want the hassles & costs of running their own limited company.

IR35

“IR35” is tax legislation announced in 1999, which took effect from April 2000. Today it is largely overshadowed by the 2007 Finance Act.

Dispensation

Every business would normally be required to complete P11D’s for each & every employee with regards to expenses claimed during the whole of the previous year. A dispensation is simply a way of reducing paperwork for both the umbrella company and for HMRC as the granting of a dispensation relieves the employer (umbrella) from having to complete P11D or P9D’s – and of course HMRC who don’t have to check individual cases. A dispensation has negligible benefit for a contractor – perhaps the cost of postage, at best.

“Overarching” contract

A contract of employment, which stipulates what, whom and how you will work throughout the relationship with your umbrella company (your employer).

‘Bacs’ and ‘Chaps, payment

A BACS (Banker's Automated Clearing Services) payment takes three working days to reach your account. A CHAPS (Clearing House Automated Payments System) payment reaches your account the same day.

24 month rule

Is an HMRC judgment that dictates once you know you will be at the same place of work for 24 months or longer, you will not be entitled to claim business expenses in order to reduce the tax you pay.

Statutory Sick Pay

You become an employee of your umbrella company and like all permanent employees you are entitled to sick pay. Your Umbrella Company is legally bound to pay you statutory sick pay after four consecutive days absent from work. You should never let your umbrella company make you pay this yourself – as many do.

Holiday pay

Like a permanent employee, contractors are also entitled to receive holiday pay as the umbrella company is the contractor’s employer.

MSC

A Managed Service Company or Composite company, provides services of individuals to other persons. The contractor avoids paying tax as payment is via dividends. £200m a year is underpaid in tax because of this type of scheme.

Payment Frequency

This determines whether the contractor is weekly, fortnightly or monthly paid.

Administration Fee

This is the fee that the umbrella Company will deduct from the contractor. Variable Fee – A percentage fee based on the contractors gross earnings. Fixed Fee – A set amount, which is not based on your earnings.

National Insurance

National Insurance is a kind of government insurance system which helps to pay for benefits, for example, the National Health Service. It also helps to pay for your State Retirement Pension.

HMRC

(Her Majesty’s Revenue & Customs) formally the Inland Revenue. They are in charge of collecting revenue for the Government, and police that current legislation is being implemented by all companies, businesses and individuals.

Timesheets

Contractors are to submit the hours they have worked to the Agency and their umbrella company, in order for an invoice to be raised.

Invoice

A request for payment from the Umbrella Company to the agency, derived from your authorised timesheet and contractual rate.

Portal

An on-line system, which some Umbrella companies will have in place, in order for the contractor to submit their timesheet, expenses and update their personal details on.

Gross Pay

Your salary before income tax, National Insurance and the deduction of any statutory commitment.

Net Pay

Your salary after the necessary deductions have been made, which is the actual amounts that reaches your bank account.

Expenses

Business costs that have been incurred due to your work commitment, which in certain circumstances, can be used to offset your tax liabilities.

P45

A document you receive from your previous employer, which you then pass on to your next employer. It is a formal record of your official tax code.

P46

A form that can be completed by the employee to determine their tax code, when they do not have a P45.

P60

Confirmation of earnings, tax and National Insurance that you have been paid over the past 12 months.

Professional Indemnity Insurance

This protects you against compensation sought by a client if you have made mistakes or are found to have been negligent in some or all of the services that you provide for them.

Public Liability Insurance

Covers claims made against you if you are shown to be responsible for personal injuries to a third party or damage to property.

Employers Liability Insurance

This type of cover enables businesses to meet the costs of compensation and legal fees for employees who are injured or made ill at work through the fault of the employer. It also means that employees injured due to an employer's negligence (lack of care) they can seek compensation even if the business goes bust.

Self-Billing

When an Agency releases funds to an Umbrella company, without the need for an invoice.

PSL

A PSL (Preferred supplier list) is made up when an agency has researched Umbrella companies (due diligence), and has put together a short list to show their contractors.

Sole Supplier

When an agency ‘encourages’ their contractors to use a single Umbrella Company, regardless of the contractor’s preferences.

Self Assessment

When you declare your earnings to HMRC for the previous financial year.