You have probably seen the terms ‘contractor’ and ‘freelancer’. If you’re self employed you’ll likely fall into one of these two categories.
A contractor is a person who provides services to a person or organisation (a client) for a specified and finite period of time. A contractor usually meets the following characteristics:
- Works on one contract at a time for one client
- Does not operate under standard employment, but rather a contract that defines their arrangement with their client for a defined period of time
- Are not on their client’s payroll
- Is set up as a sole trader, a limited company contractor or an umbrella company contractor
- Commonly found in the IT, engineering, public sector, health, education, social work, finance and consulting industries
A contractor’s contract will stipulate their working arrangements, which will determine whether they are genuinely self-employed or temporarily employed under the guise of self-employment. This is referred to as being outside or inside ‘IR35 legislation’.
A freelancer also provides services to a client for a finite period of time. However, this period of time is not always specified. Here are the characteristics of a typical freelancer:
- Might be working on several freelance projects at once for different clients
- May not necessarily operate under a contract the same way as a contractor
- More often works from home or from their own office than the client’s office, because as they are less likely to have stipulated working hours. They are more likely to have to dedicate a certain amount of hours per day or week, but not at specific times
- Similarly to contractors, freelancers aren’t on their client’s payroll
- Will also be set up as either a sole trader, as a limited company director or will be getting paid via an umbrella company
- Commonly found in creative industries such as digital marketing, graphic design, media, publishing, and architecture
Contractors and freelancers aren’t subject to the same employment rights as permanent employees. The term ‘freelancer’ is simply a way to describe the nature of your work; it is not a legal term – therefore a freelancer will still fall under the term of ‘self-employed person’. As such, freelancers will also have to consider their working circumstances to determine if they work inside or outside IR35.
How they get paid
Because freelancers are free to set their own rates per-project and based on how much experience they have, it is more financially beneficial to contract through a limited company as they can open themselves up to more opportunities with clients whilst maximising their take-home pay.
That’s not to say that contractors can’t chase the rates they desire, but more often than not the rates for a contract are already pre-set by the client or the agency. If the contractor is not satisfied with the rate, they can try to negotiate for higher pay.
If your assignment is deemed to be inside IR35, you have some options:
- Continue working through your limited company – you could continue to contract in the public sector through your limited company, and accept the lower take home pay you will receive. You will also no longer be able to claim certain expenses.
- Negotiate a higher rate – adjusting your rate to make up for the loss in take home pay is an option, although an adjustment that your client will agree to might not make up for the loss.
- Switch to umbrella – switching to a compliant umbrella company means you won’t have to pay any Corporation Tax or dividend tax on top of paying income tax and employees NI, and you will receive employee benefits unavailable to you when contracting through a limited company. Find out more about switching to umbrella.
- Leave the public sector – as many contractors have chosen, you also have the option to leave the public sector for the private sector, where these rules to do not apply to the same extent.