Did you know that there are approximately 4.3 million self-employed in the UK? And that figure actually peaked to over 5 million in 2020. The pandemic has had a huge influence on people deciding to start up their own business, and If you’re one of the ones already self-employed or thinking about going self-employed then one of the questions you may be asking yourself is how you define your worker status? Most commonly you’ll hear the terms ‘contractor’ or ‘freelancer’ used – but what’s the difference and does it really matter?
While the differences aren’t huge, there are some things that work slightly differently such as certain tax rules and the way you work with an organization. We’ve already covered the differences between employees and independent workers, and now we’re going to break down the difference between freelancer and contractor, so you can be clear on what the best way for you to work is, what the benefits are, and how to stay compliant in your worker status.
What is a freelancer?
A freelancer is an independent worker who works completely on their own. They typically have a number of different clients or projects at any one time, will choose where and how they work, and source all of their own clients too.
“Freelancer” isn’t a legal term, but it is a globally recognized label for those that are self-employed and they are expected to register as such and do their own taxes each year. Freelancers have a wide range of benefits such as setting their own rates, working where and how they want, and being able to tailor their working schedule in the way that suits them best. But bear in mind that as a freelancer, you are responsible for everything from marketing yourself to managing your own time and filing your taxes.
Hiring this type of independent worker is common in creative industries such as photography, copywriting, journalism, and design.
What is a contractor?
A contractor is another type of independent worker that typically only works with one or very few clients at a time but for longer periods of time. The scope of the projects is usually a little larger than freelance gigs, and in some sectors such as IT, work is often carried out on-site, in the client’s offices for example.
Just like with freelancers, contractors do have independent status, however, contractors may also work via a third-party agency (referred to as an umbrella company) as well as directly with a potential client. If this is the case then typically the third party will be the one to negotiate the scope of the project, deadlines, outcomes, and expectations.
As a contractor working with an agency, fees are still set by the Indy, but this is then negotiated and agreed between the client and the third-party agency, with the contractor very rarely having direct communication with the client when it comes to the how’s, where’s and why’s.
From a tax point of view, freelancers and contractors are virtually the same. They are both classed as self-employed and are both responsible for their own tax, and National Insurance contributions. All independent workers in the UK must also take into consideration IR35 rules when it comes to working with an organization.
Your independent worker status
In the UK, there are slightly different guidelines for defining your independent worker status than in the US. Most recently the IR35 legislation has shaken up the independent worker world, with stricter rules on what is deemed as truly self-employed. This legislation is designed to stop employees disguising themselves as contractors to reap the tax benefits.
Contractors who provide services via their own limited company, or through an intermediary such as an umbrella company are more likely to find themselves falling within IR35 so it’s important to get really clear on how you work with an organization to avoid this happening.
IR35 is nothing to worry about as long as you can provide evidence of working independently as described above. In the UK, for medium to large organizations, it is their responsibility to decide if the contractor is inside or outside of IR35 rules.
If you’re an organization that wants to know more about worker classification, then check out our 5 tips for keeping your project compliant for some helpful tips.
Which is more suited to you?
Freelancing and contracting are very similar. You may prefer freelancing if you enjoy variety and working on a diverse range of projects. Freelancing gives you the flexibility to move around and work wherever you feel like from one day to the next. This may also be more suited to you if you’re just starting out as self-employed and are looking to build your business.
However, if you want the freedom to be able to pick and choose projects but would still like a bit of structure in your day to day, then contracting can be a good way to secure an income for a longer period of time, and work on larger, meatier projects. As a contractor, you can often also find a great balance between independent working and still enjoying an office buzz on the days you’re working with certain clients.
If you’ve got your own limited company and have been self-employed for a while now, defining yourself as a contractor may work best for you in regards to getting the best tax benefits.
If you’re new to self-employment or are considering taking the leap into self-employment, then you may also find our article on the benefits of independent working useful in your transition!
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