What’s the difference between a contractor and a freelancer?

Freelancer at work

Last month the UK’s self-employed population passed five million for the first time, and many of those – certainly in the North West – are contractors or freelancers.

According to IPSE, around 8% of the UK’s contractor population is based up here, which is hardly surprising when Manchester is the biggest hub for creative freelancers and contractors outside of London.

More than 60,000 people work in the creative and digital industries in Greater Manchester, and that number’s expected to grow 27% by the year 2034. MediaCity in Salford, which houses the BBC, ITV and Post10 among others, will continue to play a large role if those figures are borne out.

A lot of those people aren’t employees on the payroll – they’re specialists brought to do specific jobs like operating Steadicams or (what a great job) managing wigs on film sets.

But are they contractors, freelancers or consultants?

I often hear these and similar terms bandied around because those using them don’t necessarily understand the subtle differences involved.

Here’s what you need to know.

Contractors: one job at a time

In my experience, contractors work on one project at a time, usually on fixed-term contracts ranging from three months to a year.

These contracts can be in any field and normally crop up when a company has an urgent project that requires expertise during particularly busy times.

At Alchemy, I provide accountancy services for contractors working in fields like technology, engineering, software development and construction, to name a few.

Each contractor sector presents its own challenges, like managing the construction industry scheme (CIS), but they also share a lot in common.

They need their business expenses handled or their tax returns managed, and I help loads of contractors who come to me asking for just that.

Freelancers: spinning plates

On the flip side, most freelancers can work on various projects for multiple clients at any one time and, as such, you need to have an eye for detail to stay on top of their finances.

That’s particularly true of freelancers in the the creative and technology industries as they often provide services for plenty of different businesses over the course of the tax year.

Think of all the admin involved with that for a second, from submitting invoices and chasing late payments, before even considering what business expenses to write off as capital allowances.

Considering most freelancers operate remotely, either working from home or in a shared working space, there are plenty of household expenses freelancers can claim.

Like contractors, freelancers can join the growing self-employed ranks, operate as a limited company or for an umbrella company. What works best will change from case to case and the best thing is always to get advice from an accountant.

Pay packets

One of the main attractions of becoming a contractor or freelancer is the enhanced pay on offer. A decent contractor, for example, can earn up to three times more than someone of equal experience in full-time employment.

As they’re not on payroll, there’s no deductions at source for things like income tax, national insurance contributions, workplace pensions or student loan repayments. Likewise, there’s more money left in their pocket thanks to cutting out middleman agencies.

While the pay’s the main benefit, there are considerable drawbacks that come with it too. Leaving full-time employment results in losing valuable workplace pension contributions, paid sick leave and holidays, maternity and (from April 2020) bereavement rights.

As contractors generally agree fixed-term contracts to supply their services, they are guaranteed to be paid over the course of the deal. Freelancers, on the other hand, can have patchier income. If they don’t work, they don’t get paid and it’s often a case of feast or famine.

Tax responsibilities

Contractors and freelancers actually have quite similar responsibilities when it comes to dealing with the taxman, although their employment statuses and business structures determine their tax treatment.

Assuming they’re registered as self-employed and operating as a sole trader or in a partnership, they need to file a tax return through self-assessment by the end of January each year.

That includes paying any taxes or NICs owed for the tax year and, of course, claiming all of those reliefs available to bring their tax bills down so that they only pay what they need to.

For companies, it works a bit differently. First, your company needs to be in profit for me to be able to work out how much you can pay yourself in the tax year. Then there’s applying any tax breaks that may reduce your corporation tax bill, which is paid at a rate of 19% on your profits.

The elephant in the room: IR35

Compliance with the off-payroll rules, known as IR35, is a major concern for many contractors, especially those in the private sector, with changes due to kick in for service-based payments from April.

The rules are a tax-avoidance measure that are set to apply to all private-sector contractors and freelancers who don’t fall under the Revenue’s definition of being self-employed.

From April 2020, every medium and large private-sector business will be responsible for setting the tax status of any contractor or freelancers they use. That’s been the case in the public sector since 2017.

We’re in a bit of limbo with this at the moment. The Government is believed to be putting the finishing touches to a review into whether or not the change will go ahead as planned.

Given the lack of an independent chair and the limited time given for the review, the indications at the time of writing are that the off-payroll rules will be given the green light as proposed.

Don’t worry, though – I can help you navigate the bureaucracy and avoid pitfalls, keeping everything clean, clear and above board.

Get in touch if you’re a specialist contractor or freelancer in need of advice.

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