A contractor is someone who provides services to a client (usually, a company).
In most cases, contractors are self-employed and need to file a Self Assessment tax return – but not always:
- you can also be a contractor working for your client through an agency or umbrella company – in this case you’re an employee of your agency, and they sort out your taxes through PAYE
- or you can be a contractor working for your client through your own limited company – in this case you’re a company director and you can either pay yourself through salary, dividends, or both. If you pay yourself a salary, then you must also pay tax on it through PAYE. If you use dividends, then you’d need to file a Self Assessment and pay dividend tax.
There is also one special situation: in the construction industry, a contractor is usually a company that is hired (“contracted”) to build a project. This company can then hire construction workers either as employees or as self-employed workers (“subcontractors”).
If you’re a self-employed worker in the construction industry, then your contractor takes 30% of your pay and gives it to the HMRC.
This isn’t the same as PAYE – this is just a scheme called the Construction Industry Scheme (CIS), and it’s meant to reduce tax evasion.
However, if you register for CIS, you can have this reduced to 20% and also be able to claim some of your tax back in April of the next tax year. The average CIS rebate is £2,000 – you can use this CIS tax rebate calculator to see how much you could get.
Hey there! We really hope this article helped you. Tax matters can be a dreadful topic at times. We know. That's why we started TaxScouts.
A stress-free way to getting your taxes done.
Have a minute? See how it works