What is Contracting?

The rapid growth of contracting in recent years has led many people who are thinking about working this way to ask the question, what is a contractor?

So what is contracting? As a contractor, are you a freelancer? A self-employed person? Or does contracting sit somewhere in-between employment and self-employment?

In truth, contracting is similar to freelancing and as a contractor you are considered to be self-employed. However, there are some key characteristics, which make contracting unique.

We’ll run through these now.

What is a contractor?

So how does one define contracting? And what does it mean to be a contractor? Well, contracting is one of the most popular forms of self-employment. In the absence of an official contracting definition, a contractor is widely regarded as a one-person business who provides services to clients via their own limited company on a temporary basis.

Is contracting freelancing?

Yes and no. Contracting is closely aligned to freelancing. As a contractor, you’ll likely be engaged by clients for a fixed - but temporary - period of time, charging by the hour, day or per project delivered. This is no different to being a freelancer, in reality.

That’s not to say a contractor is necessarily a freelancer, though. And perhaps the biggest difference - or at least one of the key differentiators - is that many freelancers work as sole traders, whereas contractors tend to be directors and owners of their own limited company. These companies are often referred to as Personal Service Companies (PSC) - but more on PSCs later.

Contracting through a limited company

As touched on, many experienced contractors work through their own limited company. This gives you a greater degree of control when it comes to managing your finances - it’s also considered one of the most tax-efficient ways to operate because it allows for tax planning opportunities.

The flip side is that it also means you will be responsible for ensuring your tax compliance. Whether it’s payroll reporting, end-of-year accounts, Corporation Tax, or VAT, there are a number of duties that directors of limited companies must carry out. But you’re not in this alone and if you decide to work as a contractor in this way, our sister company, Caroola can support you with your accounting duties and provide bespoke advice.

What is a Personal Service Company (PSC)?

While there’s no legal definition of PSCs, these are seen as limited companies formed by a contractor through which they can work and pay themselves.

The term was first coined by HMRC when the IR35 legislation was introduced in 2000 to describe individuals working through intermediaries. PSCs usually have one director - the contractor - who owns all or most of the shares.

Contracting through an umbrella company

PSC contracting isn’t the only way to operate as a contractor. And many individuals opt to work through an umbrella company, which is an arrangement that offers the best of both worlds. By this we mean it provides you with the freedom and flexibility of contracting, but also the security and many of the employment benefits that you would receive as an employee.

Another advantage of umbrella companies is that the IR35 rules are not a consideration. This is because you become an employee of the umbrella.

Umbrella companies are a particularly popular choice for those new to contracting. In this scenario, your Income Tax and National Insurance will be taken care of by the umbrella company, who will also grant you access to all of the rights of a company employee - from sick pay, maternity/paternity pay, holiday pay and even access to a pension auto-enrolment scheme.