A Contractor’s Glossary

As a contractor, you will find yourself with a greater level of responsibility regarding your finances than regular workers, with the situation throwing up many terms you may not have heard of before, or do not fully understand.

This brief glossary should help to shed light on some of these words and phrases so you’re aware of what everything means to keep you out of trouble with the taxman.

Corporation tax

If you’re the director of a limited company that is making profits, corporation tax will be levied on these by HMRC.

Gross pay

This is the total amount a worker earns, before income tax and national insurance have been deducted.


Her Majesty’s Revenue and Customs is the tax organisation operated by the UK government, which deducts tax payments and national insurance from your wages, while also providing benefits to those who need them.

Essentially, this is ‘the taxman’ and as a contractor, there are many ways in which you need to make sure you are remaining compliant with HMRC.

Income tax

This is a tax taken from an employee’s wage each month, usually deducted on a monthly basis. Depending on the amount you earn, the sum of income tax taken can vary significantly.


This is a piece of legislation introduced in 2000, which prevents limited companies from paying themselves a dividend and avoiding paying full tax payments by falsely acting as an employee. IR35 aims to stop this from happening and requires contractors to pay the same amounts of income tax and national insurance as regular workers.

Limited company

Contractors can set up their own limited company, as this is seen as the most tax-efficient way for such individuals to work. However, a lot of paperwork can be involved if you are the director of your own limited company, so it may be wise to get in touch with an accountancy service like PayStream.

National insurance

All UK employees are required to make national insurance contributions, which will be automatically deducted from their pay packet each month.

However, contractors may want to work with an umbrella company, which will take care of the deductions for them.

National insurance is used to provide assistance to health care services, retired people and those who are unemployed.

Net pay

This is sometimes also referred to as take-home pay and is the sum a worker receives once income tax and national insurance has been deducted from their wages.


This stands for pay-as-you-earn and is a type of withholding tax made on income payments to employees. The sums taken are classed as an advanced form of income tax and they can be refunded if they exceed the basic amount a worker should be paying.

Tax returns

Not all workers need to file an annual tax return, but those who do not have their national insurance and income tax regularly deducted by another party will need to. If this is the case, you need to fill out a form declaring the amount you have earnt that year and provide details of your circumstances. HMRC will then assess this and determine your tax liability.

Umbrella company

Contractors who are working under a fixed-term assignment can work under an umbrella company, which will act as an employer to them, taking care of paperwork and financial issues for them.