Contractor

A contractor is someone who provides services to a client (usually, a company). Their employment status is either self-employed, or an employee/worker working under an umbrella company.

In most cases, contractors are self-employed and need to file a Self Assessment tax return, but it’s not always the case.

I work for a client

Even if you work for a client, the way you work is quite different to how you might work as an employee or worker. There’s a lot more freedom as a contractor. 

• You don’t have to sign an employment contract
• The clients that you work with are chosen by you
• You can decline work
• You set your fees and rates
• You’re not entitled to holiday pay, sick pay or general employee benefits

How does tax work for a contractor?

For many contractors, you’re liable to pay your own taxes, unless you work for an umbrella company and pay via PAYE.

• If you work for a client through an agency or umbrella company, you’re an employee of your agency and your taxes are sorted through PAYE
• If you work for a client through your own limited company, you’re a company director and you can either pay yourself through salary, dividends, or both. When you pay yourself a salary, you should pay tax via PAYE 
• If you pay yourself via dividends, you’ll need to file a Self Assessment and pay dividend tax

Contractors and IR35

IR35 is a set of regulations that ensure that people who claim to be contractors are paying the correct amount of tax. 

Off-payroll work – i.e. those who don’t pay tax via PAYE – is a common space for what’s known as disguised employees. These are people who are employees in everything but name, but who pay tax as if they are self-employed. Of course, there are lots of people who are genuinely self-employed, and if this is you, you shouldn’t be affected. 

Read more about the IR35 changes here.