Compare contracting and freelancing

Introduction 

This short article aims to briefly compare contracting and freelancing. Over recent years there has been a growing trend for businesses of most types to hire flexible workers. This trend is in place of taking on permanent employees.

We have also seen in recent times the launch of the internet. What’s more, there has also been an increase in the ease of communications. This has, in turn, resulted in the freelance industry growing from strength to strength.

When we look into considering the difference between freelance and contract work, there are now over a million freelancers based in the UK. There are also many more millions outside of the UK.

The terms freelancer and contractor, apply to workers who work on an independent basis.

When we compare the difference in business structure between freelance and contract work for those who have their own small business though, they are quite unalike.

We have a guide that covers moving from an umbrella company to your own company and this sets out what you need to consider when you do this.

Comparison 

Freelancers usually work for multiple clients at any given time. When we look to compare the two though, many freelancers also work from home. They tend to complete single tasks for each client. What’s more, they will also start a freelance job for new clients on an ongoing basis.

What’s more, many freelancers work on a self-employed basis. Very few will have their own company as there is, in most instances, no need to do so.

On the other hand, when we compare the difference between freelance and contract work, recruitment companies will typically hire an independent contractor for a fixed length of time, perhaps a year or several months. They will tend to work for a single client and more often than not they will tend to work on their client’s premises with a set number of work hours. Furthermore, contractors usually work via recruitment agencies, and they also only tend to work for one client at a time.

In both cases, each will more than likely involve full time work and have an agreed hourly rate or even a daily rate. Alternatively, the service provider may agree a set price for a block of work or project.

Business to business basis

Contractors work on a business to business basis, either via an agency or directly with the client. They tend to either:

  • they work through an umbrella company. We have summarised the differences between limited company v umbrella. Importantly for this reason, many clients will not take on contractors as sole traders.

Other factors 

When you work on a self-employed basis, you do not have a choice when it comes to paying higher rates tax. If you are earning at a level that places you above the basic rate tax band, you will pay higher rates tax on any income that is in the higher rates tax threshold. Whether you are a contractor or a freelancer, it is best practice to engage a good accountant from the outset.

What’s more, when we look to make the comparison, clients that employ self-employed workers also have to make sure that they are officially self-employed people who complete a tax return each year. If it turns out later on that they were not, HM Revenue & Customs could chase the client for the tax and NI costs that relate to the work that the individual did for them.

It is worth noting, UK recruiters do not want the added duty of hiring self-employed people. This is because a certain risk that comes with this. Hence, this is the reason why they normally hire contractors.

Paying tax

Both contractors and freelancers need to pay tax on their income:

  • If they are operating through a company and have untaxed income (dividends) they will need to complete tax return. When doing so, they can pay over any tax that is due.
  • If they are operating as self-employed their income will be untaxed. Therefore, they will be required to pay over income tax and National Insurance contributions on their self-employment income.

Final thoughts 

As a final note, across all industries, when you compare contracting and freelancing, self-employment is the most common way of working for independent workers. In specialist and high-end industries such as IT, clients and recruitment companies prefer to engage contractors for their specialist work.

Link to Contractor Advice UK group on

LinkedIn https://www.linkedin.com/groups/4660081/

Published On: March 6th, 2021 / Categories: Moving Into Contracting /

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