I'm using GIMP, so naturally it saves as a .xcf however I don't know if this is allowed?

If not could anybody explain to me (VERY simply, lol) how to change the file type?

Thanks.

I'm not to familiar with GIMP. But program specific files would not be able to display on websites (For example, .PSD's from photoshop have layers and such... would not work here). .JPEG is another common form, but alas that file type cannot do transparent backgrounds. Both .PNG and .GIF (usually for animated images) can. .PNG files are much more detailed and so all skins must be uploaded in .PNG format with a transparent background (PNG-24 to be specific!). 

I hope this helps. More rules on skin submissions can be found here: http://beastkeeper.com/new-color-upload