A contractor is someone who offers a client—usually a business—services. Their job situation is either self-employed, or an employee/worker engaged under an umbrella firm.
Though it’s not always the case, most of the time contractors are self-employed and must submit a Self Assessment tax return.
I employ a customer
Even if you are employed by a customer, your working style is somewhat different from that of an employee or worker. As a contractor, you have much more independence.
- There’s no job contract signing required.
- The customers you deal with are selected by you.
- You can say no to labour.
- You specify your prices and fees.
- You are not eligible to ordinary staff benefits, sick pay, or holiday pay.
For a contractor, how does tax play?
Unless you work under an umbrella business and pay via PAYE, many contractors find themselves accountable for their own taxes.
Working for a customer via an agency or umbrella business makes you an employee of your agency, and PAYE sorts your taxes.
Working for a customer via your own limited business entitles you as a company director who may pay yourself either salary, dividends, or both. Paying oneself a salary calls for paying taxes via PAYE.
Should you pay yourself via dividends, you will have to do a Self Assessment and pay dividend tax.
builders and IR35
The rules known as IR35 guarantee that those claiming to be contractors pay the right amount of tax.
Common ground for what’s known as disguised workers is off-payroll employment, that is, those who fail to pay tax via PAYE. These are workers in everything except name who pay taxes as if they are self-employed. Naturally, many individuals are really self-employed; if this is you, you should not be impacted.
See more about the IR35 revisions right here.
