New contractor’s jargon buster

Like everything else in life, the contracting world has its fair share of unique jargon. While these terms are useful to know, for those new to the life of the freelancer it can be a little confusing at first.

So in order to help those new to contracting, here is a list of clear definitions of terms you may come across when you are making important decisions, like choosing an umbrella company.

Umbrella company

First thing’s first then, just what is an umbrella company? Chances are if you are new to contracting this will be one of the more attractive options available to you in terms of the way you work. Basically, this kind of firm processes a PAYE payroll for contractors while offsetting business expenses against their tax.

By working through an umbrella company you do not have to worry about IR35 legislation as you are technically working as an employee of that umbrella company.

Contractor salary calculator

contractor salary calculator allows you to workout how much your NET salary will be when working through an umbrella company – this is what you will earn after all tax, national insurance contributions and fees are deducted.

It is important to remember that these calculators are used to give contractors a general idea of their earning potential under a particular company based on their hourly rate. As a new contractor you may not have determined how much your hourly rate is yet. This sum will depend on your skills, experience and expertise.

Limited company

This is another option for contractors in terms of how they run their business. By setting up a limited company you are effectively the director of your own business. However, you will be solely responsible for all tax and payroll affairs.


This piece of legislation was introduced by the HM Revenue and Customs (HMRC) in order to close a certain loophole that allowed contractors to avoid paying large amounts of tax and National Insurance Contributions (NICs). By working through an umbrella company you will not be affected by this.


Pay As You Earn (PAYE) is the system for paying income tax and NICs in the UK. When you are paid through this method it is the employers responsibility – in this case, the umbrella company – to send the tax on to HMRC after they have deducted tax and NICs. One this is done the umbrella company will issue you with a payslip informing you of these payments.


You will receive this at the end of the year from your umbrella company. The document will tell you how much you have been paid and what has been deducted over the course of the last tax year.


This is a record of what you have paid in terms of tax so far in a year. It contains your tax code PAYE reference, National Insurance number, earnings in the tax year, tax deductions and your leaving date.


If you do not have your most recent P45 from then you may be required to fill out a P46 form to give to your new employer (umbrella company). This will in turn be handed over to HMRC to notify them of your new employment.