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. It’s live in the public sector but is due to affect those working in the private sector from April 2021. 

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.