Contractors

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. 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 as you don’t have to sign an employment contract and have the option to accept or decline clients at your own set rates. However, you are not entitled to holiday pay, sick pay or other employee perks.

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.

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