Glossary

UK contractor finance terms, plain English

Definitions for every tax, structure, and finance term used on the calculators and guides. Each entry is one or two sentences in plain English; some link to the deeper page where the term is used.

Reviewed 27 April 2026 · 60 terms

Additional rate (income tax): The 45% rate of UK income tax that applies to taxable income above £125,140 in 2026/27. It's the highest of the three rUK income-tax bands; Scottish residents have a separate Top rate at 48% above the same threshold.
Apprenticeship Levy: A 0.5% payroll tax charged to employers with annual pay bills above £3 million. Almost every umbrella company is over the threshold (they pool many contractors), so the levy is effectively passed through as a small line on contractor payslips, typically £20-£30/week at typical day rates.
Assignment rate: The amount the agency pays the umbrella company per day/week of work. Out of this the umbrella deducts their margin, employer NI, and the Apprenticeship Levy before the remainder becomes your gross taxable salary. The difference between the assignment rate and your headline take-home is the most-misunderstood number in inside-IR35 contracting. → Umbrella explained
BADR, Business Asset Disposal Relief: A reduced 10% capital gains tax rate (formerly Entrepreneurs' Relief) on the first £1 million of qualifying gains from selling or winding down a business. Often used by contractor Ltd directors to extract retained earnings via Members' Voluntary Liquidation at CGT rates rather than dividend rates.
Basic rate (income tax): The 20% rate of UK income tax that applies to taxable income from £0 to £37,700 above the personal allowance. So someone with the standard £12,570 PA pays 20% on income from £12,571 to £50,270.
Benefit in kind (BIK): Non-cash compensation an employer provides, company car, private medical, gym membership, etc., taxed as if it were salary, with the cash-equivalent value reported on a P11D. Most contractor calculators (including ours) don't model BIKs because they vary widely; if you have one, your real take-home will differ.
CEST: Check Employment Status for Tax, HMRC's online tool for IR35 status assessments. Officially binding only when the inputs accurately reflect the actual engagement. Widely criticised for under-weighting Mutuality of Obligation; use as a starting point alongside a specialist contract review, not as definitive evidence. → What is IR35?
Chapter 8 (IR35, original): The original IR35 regime in force since April 2000 (named after Chapter 8 of ITEPA 2003). The contractor's PSC determines status and operates deemed PAYE on the income if inside. Still applies to small private-sector clients today.
Chapter 10 (off-payroll working): The off-payroll working rules, Chapter 10 of ITEPA 2003. The end client (engager) determines status and the fee-payer (usually the agency) operates PAYE. Applies to public sector since April 2017 and to medium/large private sector since April 2021.
Class 1 NI: National Insurance paid on employment income. The employee pays 8% above the Primary Threshold (£12,570 in 2026/27) and 2% above £50,270; the employer pays 15% above the Secondary Threshold (£5,000). Above State Pension Age, the employee portion drops to zero.
Class 2 NI: A flat-rate NI for self-employed sole traders. From 2024/25 onwards, Class 2 is no longer compulsory at the small-profits threshold and lower; it remains voluntary for State Pension qualification (£3.65/week in 2026/27).
Class 4 NI: National Insurance paid by self-employed sole traders on profits above the Lower Profits Limit. 6% above £12,570 and 2% above £50,270 in 2026/27. Class 4 doesn't count toward the State Pension on its own.
Confirmation statement: An annual £13 filing at Companies House confirming a Ltd's registered details (directors, shareholders, registered office). Easy to miss because it's not a tax deadline; missing it for several years gets the company struck off the register.
Corporation tax: Tax paid by a UK Ltd company on its annual profits. Three bands in 2026/27: 19% Small Profits Rate (≤£50,000), 25% Main Rate (>£250,000), and a marginal-relief band between with an effective rate climbing from 19% toward 25%.
Day rate: The headline rate a contractor charges per working day, the most common UK contractor pricing unit (especially in IT, finance, consulting). Implies a 7.5-hour working day net of an unpaid lunch hour by default; some contracts specify 7 or 8 hours. → Day rate ↔ salary
Deemed payment: The IR35 mechanism that converts a Ltd company's contract income into salary-equivalent for tax purposes when the engagement is inside IR35. Strips out the dividend advantage and applies full PAYE + NI as if it were employment income. Almost always worse than working through an umbrella for inside-IR35 contracts.
Director's loan: Money a Ltd director takes from the company that isn't salary, dividend, or expense reimbursement. If outstanding more than 9 months after the company's year-end, it triggers a 33.75% temporary corporation tax charge under s.455 (refunded when the loan is repaid). Used carefully it's a useful liquidity tool; mishandled it's a tax accident.
Dividend allowance: A nil-rate band for dividend income, the first £500 of dividends per tax year is taxed at 0%. The allowance has shrunk steadily (£5,000 in 2017/18 → £2,000 → £1,000 → £500 from 2024/25). Currently looks frozen at £500. → Dividend tax calculator
Dividend tax: Tax on dividends taken from a company. Three rates in 2026/27 after the £500 allowance: 10.75% basic, 35.75% higher, 39.35% additional. The basic and higher rates rose by 2pp at Autumn Budget 2025; the additional rate was unchanged. Scottish residents pay the same rates and use rUK band caps for dividend tax purposes.
Disguised employment: An engagement that's structured as self-employment (typically via a Ltd company) but where the working relationship is, in substance, employment. The reason IR35 exists. HMRC determines this by looking at the three principal tests (control, substitution, mutuality of obligation) plus supporting factors.
Employment Allowance: Up to £10,500/year off the employer NI bill for qualifying UK employers in 2026/27. Single-director Ltd companies with no other employees DON'T qualify (a 2016 rule change). With a second employee on payroll, the company qualifies and the optimal director salary often shifts upward.
FCSA: The Freelancer & Contractor Services Association, the industry body that audits umbrella company compliance. FCSA accreditation is the cheapest available signal that an umbrella isn't running a tax-avoidance scheme. Common UK accredited umbrellas: PayStream, Parasol, Brookson, Giant Group, Liberty Bishop, Workwell. → Umbrella explained
Flat Rate Scheme (VAT FRS): A simplified UK VAT scheme where the business pays HMRC a fixed percentage of VAT-inclusive turnover instead of doing the full input/output VAT calculation. For typical IT contractors at the 14.5% sector rate, FRS keeps about 1-2% of turnover compared to standard VAT, small but real.
HICBC, High-Income Child Benefit Charge: A claw-back of child benefit for households where the highest earner has £60,000-£80,000 of adjusted net income. Above £80,000 the entire benefit is recovered via self-assessment. Not modelled by most calculators on this site; if you receive child benefit and earn in this band, calculate separately.
Higher rate (income tax): The 40% rate of UK income tax that applies to taxable income from £37,700 to £125,140 above the personal allowance. Inside this band, every extra £1 of gross salary loses 40p to income tax.
Holiday pay (rolled-up vs accrued): Two ways umbrellas handle the 28-day statutory holiday entitlement. Rolled-up: the holiday-pay equivalent (typically 12.07% of taxable salary) is added to each pay-period payment, you self-fund time off. Accrued: the umbrella holds back the equivalent in a holiday pot, you claim it when you take leave. The Supreme Court's 2023 Pimlico Plumbers ruling clarified that rolled-up is legal as long as it's clearly itemised on the payslip.
Income tax: The UK personal tax on earned income. England, Wales, and Northern Ireland use a three-band schedule (20% / 40% / 45%); Scotland uses six bands (19% / 20% / 21% / 42% / 45% / 48%). Both apply to taxable income, gross income minus the personal allowance.
IR35: The UK tax rule that asks whether a contract engagement is genuinely self-employed or disguised employment. Inside IR35 means HMRC (or the engager under off-payroll rules) treats the contractor as employed for tax purposes; outside IR35 means genuine self-employment. → What is IR35?
IR35 insurance: Cover bought from specialist insurers (Kingsbridge, Qdos, IR35 Shield) for £200-£500/year that covers HMRC investigation defence costs and, in many policies, the tax bill itself if HMRC wins. The expected cost of an investigation typically dominates the premium for outside-IR35 contractors.
Limited company (Ltd / PSC): A UK company you own that invoices clients directly. You pay yourself a director salary plus dividends. Tax-efficient for outside-IR35 contracting. Setup ~£50 at Companies House; run-cost ~£1,900/year including a specialist contractor accountant. → Setting up a Ltd
LEL, Lower Earnings Limit: The earnings threshold above which the year counts toward your State Pension qualifying years, even if no actual NI is due. £6,708 in 2026/27. Sometimes recommended as a minimum director salary for sole-director Ltds wanting to maintain State Pension entitlement on simplicity grounds.
Main rate (corporation tax): The 25% corporation tax rate for company profits above £250,000 in 2026/27. Below this, marginal relief applies; below £50,000, the 19% Small Profits Rate applies.
Marginal relief (corporation tax): The mechanism that smoothly increases the effective corporation tax rate from 19% (at £50,000 of profit) to 25% (at £250,000) by deducting (250,000 − profit) × 3/200 from the main-rate liability. Each extra £1 of profit in this band is taxed at a marginal 26.5%, the highest effective marginal rate on a UK Ltd company.
Marginal tax rate: The rate of tax on the next £1 of income, what HMRC takes from a pay rise or extra contracting income. Distinct from the effective rate (the average across all your income). Marginal matters when deciding whether to take on extra work; effective matters for budgeting.
Marriage Allowance: A small UK income-tax saving for married couples / civil partners where one is a basic-rate taxpayer and the other earns below the personal allowance. The lower earner can transfer £1,260 of unused PA to the higher earner, saving up to £252/year. Not auto-applied by most calculators.
Mini-umbrella: Tax-avoidance schemes marketed as umbrellas, often promising 80%+ retention rates by disguising income as loans, fragmenting employment across many tiny companies to dodge employer NI thresholds, or using offshore structures. HMRC pursues the contractor when these schemes collapse. Listed on the gov.uk named-tax-avoidance-schemes register.
MOO, Mutuality of Obligation: One of the three principal IR35 tests. Asks whether the engager is obliged to provide work and the contractor is obliged to accept it. Continuous mutual obligation is employment-shaped; engagement-by-engagement, walk-away-anytime arrangements are contractor-shaped. HMRC's historical position has been that MOO exists in any paid engagement; the courts have repeatedly disagreed.
MVL, Members' Voluntary Liquidation: The UK procedure for winding down a solvent limited company. A licensed liquidator (£1,500-£3,000 fee) takes over and distributes the company's assets to shareholders. The cash extraction is taxed as a capital gain, typically 10% with Business Asset Disposal Relief for eligible contractors, instead of dividend rates. Worth it for £20,000+ of retained earnings.
Net pay / take-home: What actually lands in your bank account after every deduction (income tax, NI, student loans, pension, etc.). The key number for budgeting and financial decisions, and the headline result of every calculator on this site. → Take-home calculator
Off-payroll worker: A contractor working through a personal service company whose engagement falls under the off-payroll rules (Chapter 10). The end client determines IR35 status and the fee-payer operates PAYE.
P11D: An annual HMRC form an employer files to declare benefits in kind provided to employees. The cash-equivalent value is taxed as if it were salary. If you have a P11D, your real take-home will differ from a calculator that doesn't model BIKs.
PA, Personal Allowance: The slice of UK income taxed at 0%. £12,570 in 2026/27 for most adults. Tapered by £1 for every £2 of income above £100,000, hitting zero at £125,140, creating the famous 60% effective marginal rate trap.
PA taper / £100k trap: The personal-allowance taper between £100,000 and £125,140 of income. Each extra £1 of income reduces the PA by £0.50, which means £0.50 of formerly-untaxed income now enters the 40% band. Combined with the 40% on the £1 itself, the marginal rate hits 60% (62% with NI, ~67% with student loan).
PI insurance, Professional Indemnity: Insurance covering claims arising from professional services you provide, bad code that broke the client's system, a flawed report that lost them money, etc. Typically £200-£400/year for a typical IT contractor. Most agencies require it before you can start a contract.
Plan 1 / 2 / 4 / 5 / Postgrad (student loans): The UK's five concurrent student loan plans. Plan 1 (pre-2012 England/NI undergrads), Plan 2 (post-2012 England/Wales undergrads), Plan 4 (post-2007 Scottish undergrads), Plan 5 (post-2023 England/Wales undergrads), and Postgrad (postgraduate loans). 9% of income above each plan's threshold for undergraduates; 6% above £21,000 for Postgrad. Multiple plans stack with HMRC-specific rules.
Primary Threshold (NI): The earnings threshold above which an employee starts paying Class 1 NI. £12,570 in 2026/27, aligned with the personal allowance, which is why the £12,570 director salary is the standard optimal for Ltd contractors.
Salary sacrifice: An arrangement to give up gross salary in exchange for a non-cash benefit, usually pension contributions. Because the sacrifice happens before tax and NI are calculated, the saving is income tax + employee NI (and via umbrella, also employer NI flows back as more total comp). The single most powerful tax move available to umbrella contractors.
SA302: A summary of your tax calculation from HMRC's self-assessment system. Lenders use 2-3 years of SA302s to evidence sole-trader or Ltd-director income for mortgage applications.
SDS, Status Determination Statement: The written statement an end client must give a contractor under Chapter 10 (off-payroll), setting out the IR35 status decision and the reasoning. The contractor can challenge via the Status Disagreement Process; the engager has 45 days to respond.
Secondary Threshold (NI): The earnings threshold above which an employer starts paying Class 1 employer NI. £5,000 in 2026/27. The optimal-director-salary tradeoff balances corporation tax relief on the salary (good) against employer NI on the salary above the secondary threshold (bad).
Self-Assessment (SA): The UK system for declaring untaxed income and reconciling tax owed. Mandatory for sole traders, Ltd directors, and anyone with significant non-PAYE income (rental, dividends above £10,000, etc.). Annual filing deadline 31 January following the end of the tax year.
Settlements legislation (s.660 / spousal income split): Anti-avoidance rules that prevent certain spousal arrangements from being used to shift income for tax purposes. For Ltd contractors splitting dividends with a spouse, the shares must be ordinary shares with full rights, not artificially restricted 'B shares' that allow dividend rates to differ, or HMRC can re-attribute the income to the original earner.
Small Profits Rate (corporation tax): The 19% corporation tax rate on company profits up to £50,000 in 2026/27. Above £50,000 the marginal-relief band starts; above £250,000 the 25% main rate applies.
Sole trader: A self-employed individual operating without a separate company. Profits are taxed as personal income (income tax + Class 4 NI + Class 2 voluntary). Simpler than Ltd, less tax-efficient at higher incomes. Most common in trades, creative, healthcare, and short-engagement contracting.
SPA, State Pension Age: The age at which UK State Pension starts. Currently 66 in 2026 (rising to 67 by 2028). Above SPA, employees stop paying Class 1 employee NI on earnings, which materially changes the optimal Ltd director salary because one of the main costs of higher salary disappears.
State Pension qualifying year: A tax year in which you earned at least the LEL or paid voluntary NI. You need 10 qualifying years for any State Pension at all and 35 for the full new State Pension. Director salaries above the LEL (£6,708 in 2026/27) earn a qualifying year without any actual NI being due.
Strike-off (company): Removing a UK Ltd company from the Companies House register. £33 fee. Requires the company to be dormant for 3+ months, free of debts, and (for tax-efficient cash extraction) total assets under £25,000. For larger asset values, MVL is the cleaner exit.
Substitution (right of): One of the three principal IR35 tests. Asks whether the contractor can send a different qualified person to do the work in their place, with the client required to accept them. A genuine, unfettered, exercisable substitution clause is the strongest single indicator of self-employment.
Umbrella company: An employer-of-record company that puts inside-IR35 contractors on PAYE. Charges the agency the assignment rate, pays the contractor a salary out of it, handles employer NI and PAYE. Pick FCSA-accredited providers; avoid mini-umbrellas. → Umbrella explained
VAT, Value Added Tax: A UK consumption tax of 20% on most goods and services. Compulsory registration above £90,000 of annual turnover; voluntary below. For B2B contractor Ltds whose clients reclaim VAT, voluntary registration is usually worth doing.

Term missing or wrong? Email hello@contractormaths.co.uk. Reviewed: 27 April 2026 · See how we calculate · not financial advice.