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Self-employment vs. contracting in the UK: What’s the difference?

by Kobus Van den Bergh | Oct 11, 2018
  • Although the terms “self-employed” and “contractor” are often used interchangeably, there are important differences between the two. Generally, all contractors operating as individuals are self-employed, but not all self-employed individuals are contractors. This has important tax implications and you need to be aware of the nuanced differences.

    What does it mean to be self-employed?

    Self-employed individuals do not have to be contractors. For example, someone who runs their own store is self-employed, but is not a contractor. Those who make and sell products to the public are not generally classified as contractors. Someone is deemed to be self-employed if the following apply:

    • They provide their own services, but may also sub-contract work to others, or bring in outside assistance
    • They can decide what work to do and when
    • They can hire someone else to do the work
    • They can work for more than one client at a time

    So, what makes someone a contractor?

    Contractors are different to freelancers, consultants and temporary staff. They have a contract for a specified period and are recruited to achieve a specific objective or complete a particular defined task. A contractor can work as an individual or through a limited company.

    Contractors are taxed differently. The way in which a contractor is taxed depends on whether or not they are working through a limited company. Contractors who work as individuals are subject to Income Tax based on their profits. Contractors operating through their limited companies are subject to tax as an individual (special rates apply) and their limited company is subject to Corporation Tax.

    Corporation Tax is set at 19% for the 2017/2018 tax year; a 1% cut from the 2016/2017 tax year. What’s more, the UK government has stated that they aim to cut Corporation Tax down to 17% by 2020. The basic Income Tax rate is 20% and the higher rate is 40%. So for contractors, particularly those who earn £200 or more per day, working through a limited company will save an enormous amount of tax.

    Interested in setting up a limited company?

    The biggest obstacle for contractors is usually the time and effort it takes to set up and register a limited company with Companies House in the correct way. Our specialist contractor accountants can set up your limited company for you within 24 hours, as well as take care of the Certificate of Incorporation, Memorandum and Articles of Association.

    If you have any questions about setting up your limited company, simply pop our contractor accountants an email or give us a call on +44 (0) 20 7759 7530.

    We are a professional services company that specialises in cross-border financial and immigration advice and solutions.

    Our teams in the UK, South Africa and Australia can ensure that when you decide to move overseas, invest offshore or expand your business internationally, you’ll do so with the backing of experienced local experts.

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