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Payroll and Contractor Glossary
Benefit in kind
A benefit in kind is like a non-monetary wage payment: some other perk like Pension contributions, parking, a work canteen, child vouchers, etc. Often these benefits are attractive because the may not be taxed or are taxed a favourable rate. There is a huge range all with special conditions.
CIS Scheme Holiday Pay
For temporary workers in the construction industry there is a special scheme (due to close in 2012) which allows holiday pay to be paid without Employer's or Employee's National Insurance. The fund must be not administered by the employer but rather by a separate organisation which holds the money in trust for the employer.
Class 1 NIC
Class 1 NIC is paid by Employers and Employees for people over 16 who are employed. The benefits acrued are for maternity, incapacity and pensions. Class 1a is paid on some benefits such as company cars and does not acrue any benefits. Class 1b is almost not used.
Class 2 NIC
Class 2 NIC is paid by self employed workers once their earnings go over the small earnings exemption (similar to the ET). Class 2 provides for pensions and other welfare. Self employed will also pay Class 4 if their earnings exceed an upper limit (in 2009/10 this is £43,875).
Class 3 NIC
Class 3 NIC is a voluntary contribution and is often paid by people who have a shortfall in their lifetime contibutions in order to protect pension rights which might be reduced due to missing contributions, for example when abroad or long term sick. Class 3 accrues the same benefits as Class 2.
Class 4 NIC
Class 4 NIC is paid by the self employed if their earnings exceed an upper limit (in 2009/10 this is £43,875). Class 4 does not accrue benefits.
Composite Company
This is an older payroll structure with similarities to an umbrella company, it involved making a number of contractors shareholders in a limited company. It paid part PAYE and part dividend. Today this would be it in breach of the Managed Service Companies legislation and so Composites have died out.
Credit Note
This is the opposite of an invoice. Rather than making a charge to someone, a credit note will credit them the amount shown on it. If an invoice has been raised in error a credit note will be used to make the correction by reversing the invoice.
ET / Earnings Threshold
The Earnings Threshold is the amount of weekly wage that is needed before the employee or employer pays National Insurance at a non-zero rate. National Insurance is due on the wage from the Lower Earnings Limit, although in 2009/10 the percentage due on the bit between the LEL and ET is 0% for contracted in employees and their employers and -1.6% for contracted out employees and -3.7% for their employers.
Expense Dispensation
An expense dispensation is document granted by HMRC intended to streamline a company's expense system and end of year documentation specifically the production of P11Ds. They are different for almost every company and may include some scale rate payments. Generally, however, a dispensation does not mean that receipts are not needed, it just affects the reporting process.
Holiday Pay
Most employees are entitled to holiday pay this needs to pay the contracted rate on those days that you are not working. The holiday allowance has recently increased to a minimum of 5.6 weeks (28 day) per year; this includes the Bank and Public Holidays.
Invoice
By raising an invoice a company or contractor is making a charge to someone. If the person raising the invoice is registered for VAT, the invoice will have to include VAT as well.
IR35
IR35 was introduced in 1999 to combat the practice of individuals who had set up companies to preform contract work, from paying the majority of their salary over as dividends. The idea was to reduce the amount of National Insurance due. IR35 makes reference to control and financial risk/rewards as does the self employed test.
LEL / Lower Earnings Limit
The Lower Earnings Limit is the level at which National Insurance is due to be paid. This value is the same as the pension rate rounded down to the next whole pound. So for 2009/10 the pension rate is £95.25 so the LEL is set to £95. The rate depends on whether the employee is contrated in or out. The rates above the UAP and the UEL may be different.
LLP / Limited Liability Partnership
Until April 2001 Partnerships had unlimited liability but since then a new Limited Liability Partnership has been introduced. This is like a Limited Company but the liability is the responsibility of the partners or member of the partnership but limited to the assets of the LLP; so if member have contributed assets to the partnership these can be lost but personal assets cannot.
NI / National Insurance
National Insurance contributions (NICs) are paid by everyone (employed and self employed) to build up entitlements to some benefits notable the State Pension and other welfare. There are four classes of NI (although Class 1 is split into three types). Contributions are made by the employer called Employer's NIC or and employees pay Employee's NIC. Employees stop paying NIC end at retirement age.
NIC / National Insurance Contribution
See NI / National Insurance
PI / Professional Indemnity Insurance
Professional Indemnity Insurance protects the business or sole trader from claims from disatisfied clients as a result of some defect or perceveid defect in the work. These defects may be as a result of poor workmanship, negligence or a simple mistake but would otherwise cause financial harm to the company or sole trader or at least reputational loss if he could not afford to put the work right.
PL / Public Liability Insurance
Public Liability Insurance protects the businesss from claims made by the public for damage or injury whilst on the business premises and often en-route to the business (thing delivery drivers etc.). The costs vary widely depending on the type of business. Some of these policies are rolled into the Employer's insurances and are called Public and Employer's Liability Inruance and cover the employees as well as the public.
Rolled up holiday pay
Holiday pay is normally paid when you go on holiday but some companies used to roll up holiday pay into the normal weekly pay. This means that you would not be paid when you are on holiday because you have already had the money. Since April 2007 this practise is not allowed.
S2P / State Second Pension
Sometimes referred to as Additional State Pension and previously called State Earnings Related Pension Scheme (SERPS), this pension is paid in addition to the normal old age pension and its value is based on the earnings between the LEL and the UAP. Some employees, where there was a company based pension scheme, have opted out of the State Second Pension relying instead on a private or company scheme, and these employees pay a lower rate of National Insurance between the ET and the UAP (previously UEL). Some part of the SERPS pension can be inherited by the surviving spouse.
Scale Rate Payment
A scale rate payment is a payment that is defined as a fixed amount that can be claimed without a receipts, for example an allowance of £20 for staying overnight with a relative whilst away on business. Of course you need to be able to prove you were staying with them!
Single Person Company
This is a payroll structure that could be considered the forerunner to both Umbrella Companies and Personal Service Companies. It consisted of placing an individual as a shareholder in a limited company alone and paying them part PAYE and part dividend. It was made obselete by the Tackling Managed Service Companies legislation.
Substitution / The Right of Substitution
One of the core concepts that needs to be considered when establishing employment status. Substitution deals with the idea that if you are self employed you should have the right to send another skilled contractor in your place or have someone assist you in your work. Not having the right of substitution points towards a person being an employee, but doesn't make it conclusive. The core concepts are The Right of Control, Financial Risk and Reward, and Mutuality of Obligation.
UAP / Upper Accrual Point
The Upper Accrual Point was introduced in 2009/10 as the upper limit used for calculating the benefit under the State Second Pension effectively separating this point from the UEL. Because of the link with the State Second Pension and contracting out, this is also the top of the band where contracted out employer's and employee's NI is reduced. So, for those contracted out, the rate between the UAP and the UEL are at the highest rate.
UEL / Upper Earnings Limit
Until 2009/10 the Upper Earnings Limit was the upper limit used for calculating the benefit under the State Second Pension and is no simply the upper limit of the band where the employee pays the highest rate of National Insurance. In time the UEL will be set to be the same as the upper limit for lower rate tax.
Uplift
This refers to the increase in pay rate frequently offered to a contractor for using an external payment company like an umbrella company. For example a contractor might be offered £10/hour PAYE through an agency or company, but have that increased to £11/hour if they went through an external payroll company. The reason this can be offered by an agency or company is because payroll and national insurance savings they make as a result.
