Personal Tax Code:
Your tax code is determined from your self-assessment submission and calculates the amount of tax-free income you are entitled to in any tax year. It is common for this coding to change during a year where say a contractor has had a non-earning period.
National Insurance (NI) number:
This is your unique (reference) registration number (URN) with the state and all your national insurance contributions are allocated to this URN. It is vitally important to keep your contributions up to date as the number and value of these contributions determine which state benefits (and at what level) you are entitled to claim - including retirement pension. If you are out of contract still pay these contributions (if you are registered with the Job Centre this usually means your contributions will be paid for you while you are actively seeking employment).
National Insurance (NI) Contributions:
National Insurance is paid in proportion to your salary (to fund state services and the state pension). Not only do you have to pay Employees NI, but as a contractor you are also liable to Employers NI. There is no exception to the Employers NI rule for contractors. Employees NI used to be capped so that after you paid a certain amount of NI you did not pay anymore. This is no longer the case. Similarly for Employers NI there is no maximum. You are only allowed to earn a minimal amount before NI is due.
Pensions:
Pensions are a very complex issue depending on your personal circumstances and it is strongly recommended that you get professional advice from a trusted Accountant or an Independent Financial Advisor. That said, pensions have long been the most efficient way of reducing Tax and NI liabilities.
When using a Managed Service Company (Umbrella) or those who are affected by IR35, there may be significant benefits in investing in a pension - since this will reduce your overall National Insurance and PAYE liability. Some Umbrella companies offer a group scheme where pension payments can be made from gross salary saving the NI element in addition to normal PAYE savings.
Insurance:
Once a complex and expensive area of contractor finance, many contractors are now looking at the various insurance policies that are available to protect you in the event of an accident at work, or claims against you for negligence. IT contractors for example provide a professional service that is replied upon by others (clients). This means if you make a mistake in your work you have direct financial responsibility to your client for your errors. Whilst you may consider the possibility remote, it does happen and in 2003 for example professional indemnity claims increased by 40% in the UK.
As the appetite for litigation at the drop of a hat grows, clients and agencies alike are insisting on Professional Indemnity (PI) cover at quite substantial levels. Having this protection will prove to your client/agency that you are professional in your approach and will work in your favor during the selection process. Policies provide peace of mind and are now very reasonably priced. If you are using a Managed Service Company (Umbrella) ask them to source this for you, they can usually get it cheaper than you and it is tax deductible.
Value Added Tax (a Sales Tax):
When using a Managed Service Company (Umbrella) you do not need to worry about VAT. They will include VAT on your invoices and pay the necessary amounts due to the Customer & Excise on your behalf.
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