Glossary: Terms contractors need to know

When thinking about becoming a contractor, you have probably researched the different methods of operating and may even have asked those already contracting about this career path. However, there are likely to be many terms and phrases you encounter that you are not immediately familiar with.

Below is a selection of the most common, many of which it will be important to be aware of before you make a definitive decision on a way of working:

If you are planning to move from full-time salaried employment to contracting, IR35 will have a big say in how you are recommended to operate.

It may only be beneficial for you to form a limited company and complete contracts through it if you fall outside of IR35, which is dependent on a number of factors.

While this is not categorically defined, it is generally accepted that you will be considered outside IR35 if you are in complete control of when, where and how you complete your contracts, can substitute and.there are no mutual obligations between you and the client.

However, if these conditions are set by a client, you will likely be deemed a ‘disguised employee’ of the client and should seek an alternative form of contracting, such as employment with an umbrella company.

Umbrella company
Even if you are not restricted by IR35, many contractors choose employment with an umbrella company such asPayStream as this removes the vast majority of the administrative burden associated with this career choice.

The umbrella company becomes your employer and provided you file an accurate timesheet – which can now be completed online in most cases – you will receive a weekly or monthly salary paid into a bank account of your choosing.

The main benefit of working in this way is the ability to claim tax relief on all allowable business expenses. All income tax and National Insurance deductions will be handled on your behalf.

Corporation Tax
If you form a limited company and complete your contracts through this, corporation tax will be levied on your taxable profits and is payable once per year.

Generally, this is around nine months after the end of the company’s fiscal accounting period and an annual company tax return will need to be completed. For this purpose, many contractors engage the services of qualified professionals such as accountancy service providers.

Accountancy Services Provider
Companies such as PayStream offer a wide range of accountancy services, which will assist with the general administration of a limited company.

Unless you are an accountant yourself, it is unlikely you will have much experience of book-keeping, VAT or tax returns prior to becoming a contractor.

If this is the case, the assistance provided by these companies can prove to be invaluable, helping to ensure you do not encounter any financial penalties for failing to accurately complete what is required of you on time and even helping to boost your returns.

Many contractors are not aware of certain expenses they are eligible to claim, but these professionals have experience of working with contractors and will point out such instances.