According to the Office of National Statistics, the level of self-employment in the UK increased from 3.8 million in 2008 to 4.6 million in 2015. The rise in self-employment started in the early 2000s and is attributable to changes in lifestyles and the preferences of the workforce.

Contractors are hired for their expertise, which they have developed by working for many different companies and are customarily paid more than employees. However, there are some drawbacks to being a contractor, and they include:

  • Less security : contractors are not protected in the same way as permanent employees, however, those who decide that contracting isn’t the right choice for them always have the option to close their company and return to permanent employment.
  • Uncertainty : contractors are responsible for finding work, so there is uncertainty about where the next contract is coming from. However, free job alerts and specialist recruitment agencies have made the process easier.
  • Administration : as a director of your own Limited company there will be forms to fill in, rules to obey and accounts to keep - though appointing a good accountant will lessen the burden and reduce the potential stress levels.
  • Employee benefits : while you will no longer have access to employee benefits such as holiday pay, the higher amount you earn should cover this.

Contractors add tremendous value to the economy. They don’t claim sick, holiday or redundancy pay and the employer’s don’t have to pay National Insurance on their behalf. Therefore, the company can afford to pay you more per hour/day and still be better off.

There are several reasons why companies like to use contractors. For example, contractors:

  • Are more motivated and have more in-depth and diverse skills.
  • Are easier to hire and layoff.
  • Are usually more flexible over hours than permanent staff.

Deciding How To Contract

You can contract in any of the following ways :

  • As an employee of an agency
  • Being self-employed
  • Working through an umbrella company
  • Setting up your own Limited company

For many contractors, contracting through an agency or directly, who do a lot of work for one company or employer self-employment may not be an option. HMRC will often argue that you are an employee of the company or agency you are working for, and not a self-employed contractor at all.

HMRC challenges any company considered to be actively encouraging tax avoidance through fraudulent expense claims, so it is best to seek professional advice.

Working through your own Limited company

Limited Company is by far the most common way for contractors to operate in business. You set up and run your Limited company and will usually appoint yourself as a director and shareholder.

In the eyes of the law, the company has a legal personality of its own. It is your company that enters into contracts and not you. In most cases, it will also be the company that is responsible for its debts should there be any. ‘limited liability’ will limit your exposure to the money you have contributed to the company. If the company gets into difficulty and or is forced into liquidation, then your assets such as your house or other property are protected.

Having your own company gives you complete control. Of course, there are responsibilities which go along with the privilege of being a director. Acting dishonestly or letting the company trade when it is insolvent is illegal, and you can expose yourself to risk. Therefore, it is essential to take professional advice to make sure that your Limited company is more of an asset than a liability.

Incorporation of your own company is referred to as having your own ‘Personal Service Company’. Contractors, freelancers, Interim Managers and consultants will generally perform their work through their ‘Personal Service Company’.

If you are a contractor working through your own Limited company, your take-home pay can be anywhere between 75% and 80% of your contract value, whereas through an umbrella company your take home will only be around 60% to 64%.

The main benefits of using a Limited company over an umbrella company are around NI and the Flat Rate VAT Scheme. You will often hear about IR35, which was introduced by the government to stop employees from becoming contractors by using a personal service company.

Always be wary of special schemes, solutions, short-term tax loop-holes, EBT’s, LLPs or companies that use complex offshore solutions. Many of these schemes were designed for a legitimate purpose; however, over a period, they have been adapted with tax avoidance in mind.

Some companies will make claims that they can guarantee you up to 90% of your take-home pay, reduce tax payments or offer a generous expenses package.

HMRC have a checklist of expenses you can claim that may help to ensure you don’t get caught out

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