Employment Status

Are you a contractor? If you work for someone else, it is important to know whether you are working for that person in an employed capacity or in a self-employed capacity as an independent contractor.

Your employment status will determine the charge to tax on income from your employment or self-employment. It will also determine the class of NICs, which are to be paid.

Umbrella Companies employ you for tax purposes and complete central returns for all their contractors. It's less hassle and more flexible for you but take home pay is typically less than that the limited company option.

The best option for you depends on your plans, 'one off' contract or 'contractor for life'? [Read More...]

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Umbrella Company Jargon Umbrella Company Terms

What does all that Jargon mean?

Its difficult to believe that we live in times when plain speaking is encouraged... entering the world of contracting is no differant. By the time you get to the end of your first contract, you will be able to chat comfortably with the dullest of accountants. Hey ho, its not all bad. below are a collection of terms that you need to become familiar with failry quickly. This first step is registering with an umbrella company or forming your own limited company and you will need to do it soon. Know the keywords and you will have a better idea of whats invloved.

Here's a handy glossary of terms you will hear when using an umbrella company.

Umbrella Company

An accounting mechanism which allows freelance contractors to get 'limited company' status without having to go to the bother of setting up and running their own limited company. Most contractors simply do not want the hassles and costs of running their own limited company and so prefer to use the service of an umbrella company which takes care of all the administration, legalities and paperwork for the contractor.


IR35 is a tax legislation announced in 1999, which took effect from April 2000. Today it is largely overshadowed by the 2007 Finance Act. IR35's main effect on contractors was to make it less cost effective to run their own limited company.


Every business would normally be required to complete P11D's for each and every employee in 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. A dispensation relieves the employer (your umbrella company) from having to complete P11D or P9D's - and of course HMRC, who don't have to check individual cases.

  • A dispensation does not benefit the contractor; it does benefit your umbrella company and HMRC.

"Overarching" Contract

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

'Bacs' and 'Chaps' Payment

A BACS (Banker's Automated Clearing Services) payment takes three working days to reach your personal bank account once sent from the umbrella company's bank account. A CHAPS (Clearing House Automated Payments System) payment reaches your bank account the same day it leaves your umbrella company's bank account.

24 Month Rule

This 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.

Statutory Sick Pay (SSP)

You become an employee of your umbrella company and like all 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 some try to do.

Holiday Pay

Like a permanent employee, contractors are also untitled to receive holiday pay. Usually, a proportion of your income will be withheld by the umbrella company, each time you get paid, which they will pay to you when you take time off.


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.

  • MSC's have now been outlawed.

Payment Frequency

This determines whether the contractor is paid weekly, fortnightly or monthly. The contractor will negotiate their payment frequency with their recruitment agency.

Administration Fee

This is the fee that the umbrella company will deduct from the contractor's income.

  • Variable Fee - a percentage fee (eg 3%) based on the contractors gross earnings.
  • Fixed Fee - a set amount, regardless of what you earn.

Contractors will also have to pay Employers National Insurance Contributions on top of the administration fee.

National Insurance Contributions (NIC)

National Insurance is a government tax on every worker which pays for the National Health Service. It also helps to pay for your State Retirement Pension.

Contractors pay both Employees and Employers National Insurance Contributions.


Her Majesty's Revenue and Customs, previously 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.


A formal record of hours/days that the contractor has worked. Contractors get their nominated line manager to sign and authorise this record at the end of each week/month. Once an umbrella company receives your timesheet they will raise an invoice to your recruitment agency based on hours x agreed rate.


A request for payment from the umbrella company to the recruitment agency, calculated from the contractor's authorised timesheet and contractual rate.


On-line system, which some umbrella companies will have in place, enabling the contractor to submit their timesheet, expenses and update their personal details online. Many contractors prefer this rather than having to fax or email the timesheet/expenses.

Gross Pay

The amount a contractor earns before income tax, National Insurance and any other statutory commitment have been deducted. This will be the hours worked x agreed contract rate.

Net Pay

The income earned after the tax, National Insurance Contributions and processing fees have been deducted which is the amount that is credited to the contractor's personal bank account.


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


It is a formal record of your official tax code. A P45 is an official HMRC document you receive when leaving an employer and which your new employer will request. If you do not have this document you will be charged a higher rate of tax (emergency tax).


If you do not have a P45 you will be asked to complete a P46 which will determine your tax code. This may take a few weeks to go through the HMRC system.


Confirmation of earnings, tax and National Insurance that you have paid over the previous 12 months. Do not lose this document, it is very important and can not be duplicated.

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.


When a recruitment agency releases a contractor's money to an umbrella company without the need for an invoice.


Preferred Supplier List. When a recruitment agency has researched umbrella companies (known as due diligence), and has put together a definitive list of umbrella companies from which contractors must choose one umbrella company to work with.

Sole Supplier

When an agency 'encourages' their contractors to use a single named umbrella company regardless of the contractor's preferences.

Self Assessment

Declaration of your earnings to HMRC for the previous financial year.

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HMRC Compliance

It's the basics... Compliance with Tax, VAT, PAYE and fiscal arrangements is mandatory for contractors regardless of whether you use an umbrella company or your own limited company.

Incredible then that there are still rogue umbrella companies and limited company accountants who expose their contractors to fraud. Umbrella Compare provides THE solution, we thoroughly vet all umbrella companies and limited company accountants that we list [Read more...].

Umbrella Compare provides a holistic overview of contracting with the aim of helping new and old contractors find the right payroll solutions. Contracting should be about focusing on the contract, not payroll, accounting, HMRC and bureaucracy.