The terms ‘contractor’ and ‘freelancer’ are often used interchangeably, however although both words are used to describe non-traditional professional workers, they represent quite different ways of working when it comes to tax, business structure and regulation.
Just as the term ‘self employed’ is now used to describe pretty much anyone who hasn’t got a ‘standard’ 9-5 job, the word ‘freelancer’ has become fairly ubiquitous. However, you will very rarely hear an IT contractor refer to themselves in this way.
Here are some of the key traits of each type of worker.
- Professional contractors work on fixed-term contracts for end-clients (hence the term ‘contractor’).
- They are usually professional workers who provide specific – often technical – skills, such as IT and engineering.
- Typically, these contracts are based at a client’s site, and take place during standard office hours.
- Contractors are often hired to fill temporary roles for an organisation, or to undertake fixed-term projects.
- Around 80% of contractors work for end-clients via recruitment agencies, compared to around 20% who work directly for their clients.
- Contractors almost always work via their own limited companies, or use the services of an umbrella company.
- Few clients or agencies will let contractors work as ‘sole traders’, as the terms of the Income Tax (Earnings and Pensions) Act 2003 would transfer the onus of personal tax liabilities to those further up the hiring chain unless the contractor uses an intermediary business structure.
- Contractors do not bid for work per se, but will often find themselves competing with other experts for the same contract roles.
- Contractors do not receive any ‘perks’ or employment rights from the companies they work for.
- Contractors submit invoices to either their agencies for payment, or direct to their clients.
- Limited company contractors pay Class 1 National Insurance and PAYE tax on any salaried income, and any further tax (on dividends) is paid via the annual self-assessment process. Umbrella company contractors are taxed in the same way as traditional employees.
- Freelancers often work for multiple clients at the same time – and are typically paid by the job or by hours/days worked.
- Freelancing is a popular way of working in the creative industries (writers, journalists, designers, editors, and numerous web-based roles).
- Often freelance jobs are undertaken from home, or office space. It is less common for freelancers to work full-time from a client site.
- Some freelance work is awarded via a bidding process – particularly with web-based project work.
- Freelancers source work in a variety of ways (direct with clients, via the web, via recommendations), but they rarely use recruitment agencies.
- Freelancers use a variety of business structures. Many are ‘self employed’ (sole traders), and some use limited companies. Unlike contractors, freelancers rarely use umbrella companies. There is no obligation by hirers for freelancers to incorporate, unlike the contractor model.
- Like contractors, freelancers do not receive any ‘perks’ or employment rights from the clients they work for.
- Freelancers are usually paid directly by their clients.
- Sole trader freelancers pay income tax via the annual self-assessment process, and also Class 2 and Class 4 National Insurance.
- Limited company freelancers pay Class 1 National Insurance and PAYE tax on any salaried income, and any further tax (on dividends) is paid via the annual self-assessment process.