Storm Trooper with whiteboard teaching confusing jargon

All the confusing contractor terms explained

March 10, 2020

There are lots of benefits to contracting – a wide variety of work, no bosses to answer to, and infinite opportunity to work from home – but it can also be a complex world to navigate.

If you're thinking of making the jump to self-employment, or if you're already freelancing but finding the jargon intimidating, we've clarified some of the important things you need to know when it comes to contracting in the UK.

Company structure – Refers to the way you decide to set up your business. You can opt to set up as a Limited Company, be a Sole Trader or enter in to a Partnership, all of which have different advantages and disadvantages.

Limited Company – A company that is its own legal entity. As an owner, you will be legally responsible for a Limited Company's debts only to the extent of the amount of capital you invested upfront.

Sole Trader – A structure that is inextricably linked to you as the owner. So, you keep all profits (ie. no shareholders involved), but you are also personally responsible for any losses the business might incur.

Partnership - Similar rules to that of a sole trader, however the responsibility for your business is shared between you and your partner (or partners).

IR35 – A piece of tax legislation coming into effect on April 6th 2020, which aims to identify and limit the number of people acting as employees, but benefiting from being paid as contractors. To learn more about what IR35 has in store and how it could affect you, feel free to reach out to one of our accountants for a chat.

Payroll – Payroll is a list of a company's employees and the amount of money they are to be paid. As a contractor or a limited company director, you need to run payroll every month in order to be compliant with PAYE.

PAYE – 'Pay As You Earn' refers to the income tax system in the UK, where employers make income tax and national insurance payments on behalf of themselves and their employees, deducting the necessary amount from their monthly salary. As a contractor, you will have to submit this yourself every month when you complete payroll through RTI.

RTI – RTI, or Real-Time Information, was introduced in 2013 to make PAYE submissions more efficient. Instead of submitting PAYE taxes (national insurance and income tax) at the end of the year, RTI requires information to be submitted in real time, every time you pay yourself (or your employees).

Dividends – As the owner of a limited company, you have the ability to declare dividends: profit (after corporation tax) which gets paid out to shareholders (ie. you). Because dividends are typically taxed at a lower rate than a salary, it may be more tax beneficial to work out an optimum balance of the two. Partnerships and sole traders cannot pay dividends. Make sure to reach out to us, so we can help you pay yourself in the most tax effective way.

Making Tax Digital – In an effort to make it easier for businesses and individuals to "get their tax right and keep on top of their affairs," HMRC has gone paperless. Currently only applicable to VAT and self-assessment, MTD involves keeping digital records and using software to complete tax returns.

Tax return – Your tax return is a document declaring your liability to be taxed and your claims to tax relief, lodged yearly with HMRC. Filing a tax return as an individual is also called self-assessment, and for an organisation, it is referred to as Corporation Tax. As an individual, you won't need to send a return if your only income is from your wages or pension, but you may need to if you have any other untaxed income, such as property rental income, tips and commission, income from savings, investments and dividends, or foreign income.

Tax rebate – This is money you'll get back from HMRC if you have overpaid in tax during the tax year, or over a period of a few years. HMRC will send you a P800 letter informing you if you're due a rebate, but you will still need to claim it yourself.

Expense categorisation – When you lodge your corporation tax at the end of the financial year, you need to categorise every expense you've incurred – from phone bills to travel costs to food and drink, etc – into a category. This is traditionally a very time-consuming and laborious process, which is why we're allowing you to keep up to date straight from your bank feed. Head to the understanding our categories guide to see a description of each category, and what you can and can't claim.

Ember is all about simplifying finance and tax for contractors.

Simple language, simple software, so that you can spend less time dealing with admin and more time focusing on what really matters.

Daniel Hogan

Daniel is a Deloitte-trained, fully qualified Chartered Accountant with experience in the finance software space. It was during his tenure managing a finance system in the UK that he grew dissatisfied with the lack of synergy and automation in the space, compelling him to co-found Ember.