This short article aims to briefly compare contracting & freelancing. Over recent years, there has been a growing trend for businesses of most types to hire flexible workers. This trend when taking on people who provide freelance and contract work 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 communication. This has, in turn, resulted in the freelance industry growing from strength to strength.
When we compare contracting and freelancing and look at the difference between these, there are now over a million freelancers in the UK. There are also many more millions outside of the UK.
Compare contracting and freelancing -initial thoughts
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.
Besides this guide which looks to compare contracting & freelancing, we have another guide which covers moving from an umbrella company to your own company. This sets out what you need to consider when you start up as a limited company contractor.
Contracting and freelancing comparison
When we look at freelancing vs contracting, it is notable that freelancers usually work for multiple clients at any given time, and they also set their own rates. When we compare the two, many freelancers also work from home. An example of freelance workers includes web developers or other short-term IT projects. They tend to complete single tasks for each client. Moreover, they will also start freelance jobs 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. This could be fairly long-term, perhaps a year or several months. They will tend to work for a single client on a specific project, and more often than not, they will work on their client’s premises with a set number of work hours. Furthermore, when we do a contracting & freelancing comparison, it is notable that contractors usually work via recruitment agencies and only work for one client at a time.
Both cases will likely involve full-time work and have agreed hourly or daily rates. Alternatively, the service provider may agree to a set price for a block of work or project.
Key to note, freelancers and contractors work on an independent basis, while an employee works for a company.
Contractors work business-to-business, 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.
Compare contracting and freelancing -other factors
When you work on a self-employed basis, you do not have a choice when paying higher tax rates. If you are earning at a level that places you above the basic rate tax band, you will pay higher tax rates on any income in the higher rates tax threshold. Whether you are a limited company 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 that they were not, HM Revenue & Customs could chase the client for the tax and NI costs related to the work the individual did for them.
It is worth noting that UK recruiters do not want the added duty of hiring self-employed people. This is because of a particular risk that comes with this. Hence, this is the reason why they usually hire contractors.
Compare contracting and freelancing -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 must complete a 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.
Finally, across all industries, when you freelancing vs contracting, self-employment is the most common way of working for independent workers. In specialist and high-end sectors such as IT, clients and recruitment companies prefer to engage contractors for their specialist work.
Link to Contractor Advice UK group on