The world of umbrella companies and contracting can be confusing to navigate. That gets even worse if you’re not familiar with all the jargon and general contractor terminology being thrown around. But don’t let it put you off. Contracting can be hugely beneficial in the long run.
Fortunately, we’re on hand to help you get over that first hurdle with our guide to contractor and umbrella terminology.
What is an ‘umbrella company’?
First of all, what exactly is an umbrella company? Go back around fifteen years and nobody would know what the term meant. However, over the past decade or so, umbrella companies have been rising in popularity. And for good reason too.
They provide a hassle-free option for contractors, taking care of the tedious, complicated and time-consuming aspects of contractor life. From providing a payroll service to processing timesheets and invoices, they can tick off those annoying but necessary extra tasks. This allows contractors to instead put their focus on their work.
How does it work?
Umbrella companies act as a third party to you and your clients. Taking the role of your ‘employer’, they’re able to pay you a salary, first deducting all necessary taxes so you don’t have to think about it. They’ll also chase up invoices, making them the perfect solution for those bored of business admin.
If you’re unsure about leaping into contracting life, then umbrella companies provide a low-risk method of trying it out. If it goes well, you can always form your own limited company at a later date.
The negatives
Of course, there are downsides. Umbrella companies don’t have as many tax benefits that limited companies do and they do charge a fee. This is something that will be deducted before you receive your salary.
Navigating umbrella company jargon
One thing’s for sure though, there’s a lot of terminology and confusing jargon associated with umbrella companies and contracting in general. This can prove to be a bit of a headache when you’re trying to make an educated decision on how to proceed.
To help you navigate the terminology, we’ve gathered some of the most frequently used words and broken down what they really mean…
BACS
BACS stands for Bank Automated Clearing System. This is the typical method that will be used to transfer money from an umbrella’s or client’s bank account to yours. The time these take to clear is usually quick, but they can take up to 2-3 working days to appear in your account.
Dispensation
This is something that assists umbrella companies when it comes to expenses. Instead of filing an expenses report on something called a P11d form, they can do this. Without dispensation, the umbrella company would be required to see the receipts of every expense you claim.
Expenses
These are costs you might unavoidably incur as a result of your work. However, there are limitations on what is, and isn’t, allowed to be included in your contractor expenses.
Gross
You’ll most commonly see this when referring to pay or income. The gross is the total income before any deductions at all have been made.
HMRC
Otherwise known as Her Majesty’s Revenue & Customs, this is the institution behind tax collection for the government. It is their job to ensure that all pieces of legislation are being followed compliantly.
Invoice
This is key for you to get paid! Typically known as a payment request, it will detail the work completed, the time it’s taken and the rate where appropriate.
IR35
IR35 is a hot topic of late, it is a government tax legislation that has been around for nearly two decades now. This piece of legislation is in place to highlight anyone working as a ‘disguised employee’.
There are certain tax benefits that contractors receive when not an employee, so people have attempted to cheat the system by registering as a contractor whilst being an employee.
MSC
Hopefully, you won’t come across this, but it’s important to be aware of nonetheless. An MSC is a ‘Managed Service Company’, something that was made illegal back in 2007. They’re a third party that makes dividend payments to contractors.
Net
Unlike ‘gross’, this is the total after all deductions have been made. In this context, it will refer to your ‘take-home’ pay.
The ‘P’s
From P45 and P60 to P46, there are many P’s, making it easy to get confused.
A P45 is an official record of your tax payments and taxable income within the current tax year. This is typically given to you when you leave a place of employment.
A P60 is a record of your total earnings and tax paid within a year, this is issued at the end of every financial year.
A P46 is what comes into play when a P45 is not available. Employers can use this to help them determine what tax code you should be on when processing your payments.
PAYE
Standing for ‘Pay as You Earn’, this the method most commonly used in permanent employment situations. It allows tax and national insurance contributions to be determined from your earnings.
Self-assessment
This is what you’re required to do should you have earned outside of a PAYE set up. You’re required to declare your earnings and fill this out for the previous tax year and give it to HMRC.
Self-billing
If you come across a client that says they’re self-billing, they pay directly from timesheets rather than from an umbrella company’s invoice.
Timesheet
Simply put, this is a sheet where you record the number of hours/days that you’ve worked for a particular project. The use of these is more widespread than just that of umbrella companies. However, umbrella companies will use your timesheet to generate invoices to send out.
Finding the right umbrella company for you
Now you’ve got the basics down, you’re well on your way to deciding as to whether an umbrella company is the right route for you. The next step is to choose the best umbrella company.
There are many things you should consider when making your choice. Most importantly, you need to be aware of their fee structure, payment frequency and schedule. Also, consider their insurance cover and other benefits.
It goes without saying to check out their history and what others are saying about them online, too. There are a few other benefits to be aware of when comparing companies. This can include things such as insurance cover, contributory pension schemes and the technology.
Need a hand finding the right umbrella company? Umbrella Broker can help. Our handy umbrella comparison site will provide you with a clear overview of take-home-pay from a range of top providers.
