Umbrella Company glossary of terms

If you’re considering a career in contracting and doing some research about what it involves, you may be wondering what certain terms mean, and how they could affect you. In this glossary of terms we debunk the main terms you’ll come across as a contractor, to help you navigate your way through the world of Umbrella Companies.

BACS – stands for Bank Automated Clearing System, and is the standard bank transfer method used to pay employees. A BACS transfer traditionally takes 2-3 working days to clear into your personal bank account.

Dispensation – A dispensation allows an Umbrella Company to process expenses without having to make a record of them on a P11D form. Without a dispensation the Umbrella would need to request to see receipts for every single expense you claim. A dispensation does not dictate which expenses you’re able to claim.

Expenses – If you incur costs as a direct result of your contract, you may be able to claim them as expenses. Your accountant will be able to advise you further on this, and help you with claiming back any expenses.

Gross pay/income – This is your pay before the relevant tax, National Insurance, and any other statutory payments have been deducted.

HMRC – Stands for Her Majesty’s Revenue & Customs, and it’s their job to collect tax revenue for the government. They also police current tax legislation to ensure companies are compliant, and are paying the correct amounts of tax.

Invoice – Is a payment request, which details the hours worked and at which rate, that is issued by the Umbrella Company to the end hirer / client. This is once the Umbrella employee has submitted their timesheet details.

IR35 – Is a piece of tax legislation introduced by HMRC to identify those workers who are acting as ‘disguised employees’. This basically means that they’re claiming to be self-employed and are therefore claiming the relevant tax benefits provided only to those who are truly self-employed, when in fact they’re in permanent employment. Take a look at our blog for more information on IR35, and what you need to be aware of.

Net pay/income – This is your pay after the relevant tax, National Insurance, and any other statutory payments have been deducted. This is what you’ll receive in your personal bank account once your Umbrella Company has paid you.

P45 – When you leave an employer you’ll be given a P45, which is an official record of your total taxable earnings and tax paid to date in the current tax year. You should pass your P45 to your new employer.

P60 – Is an official record of your total earnings and the amount of tax you’ve paid to date during a specific tax year. This is issued by your current employer at the end of every financial year.

PAYE – Stands for Pay As You Earn – a method used to determine how much tax and National Insurance contributions (NICs) is due on your weekly / monthly earnings.

MSC – Stands for Managed Service Company. An MSC is a third party service designed to make dividend payments to contractors. This practice has now been made illegal with new legislation introduced back in April 2007.

Same Day Payment – Means funds will clear into your account the same day you’re paid.

Self-Assessment – If you receive any earnings from sources other than through PAYE you must complete a self-assessment form, and declare your earnings from the previous tax year to HMRC. Your Umbrella Company will be able to help you with this.

Self-billing – If an agency informs you they’re self-billing, this means that they pay you directly from your submitted timesheets, rather than from the Umbrella Company’s invoice.

Timesheet – Your timesheet is what you’ll use to record your hours and days worked, for which client and at what rate. Timesheets are used by both Umbrella Companies and Recruitment Agencies, and the recruiter will need a signed timesheet from your end hirer / client to confirm your hours worked before they issue a payment. The Umbrella Company will need a completed and signed timesheet in order to generate an invoice to send to the recruitment agency.

Umbrella Company – Provides an overarching contract between yourself and your end hirer / client. You effectively become an ‘employee’ of the Umbrella Company, and will therefore be treated as such, with the same entitlements as those in permanent employment. An Umbrella Company will pay your tax and National Insurance on your behalf, and pay you the remaining amount from your contractor pay.