Freelancers vs Contractors: What’s the difference?

The rise in the number of self-employed people in the UK has been a steady trend for two decades. Flexible working, shifting employment patterns, and changes to the tax regime have all contributed to a bulge in the number of those working for themselves: Indeed, according to a recent The Office of National Statistics from 2019, there were more than 5 million self-employed individuals in the UK. In the UK, self-employment now contributes 3.3% more to the labour market than it did in 2000.

The report also revealed that 12.3% of self-employed workers identified themselves as freelancers, while 10.2% identified themselves as a subcontractor. Freelancers and contractors use different vehicles to sell their services. From a tax compliance perspective, there are few differences, but when it comes to legal rights and obligations there are some things you should know if you’re employing either or both of these types of self-employed workers.

In short, a contractor works for their client on a pre-determined contract basis. They sign a contract with the employer and may enjoy the status of short term workers. If they do get this status they can work at the company offices and may even be added to the payroll.

However, if the contractors stay off-payroll they will remain responsible for their own tax affairs and will have to pay income tax and NI through the self-assessment system.

Many contractors, however, work with clients through agencies. By doing so, they are considered as agency workers assuming they have agreed that in the contract. As an agency worker, they can demand National Minimum Wage as well as other rights.

In case, if these contractors sign up for a contract for the “pay between assignments” with the agency, then they can get other supplemental rights and responsibilities as agency employees. Contractors can work with different agencies simultaneously to find multiple suitable contracts.

Hiring contractors makes sense if you are likely to have multiple short term projects on the go at any one time.

Freelancers, by contrast, are different. They are less bound by contractual limits and as a result, enjoy fewer protections under the law. As such, employing a freelancer requires less work from the hiring company: you would simply commission the work and pay on completion (or whatever terms you agree with the freelancer). As with contractors, freelancers take care of their own tax affairs.

This should be formally written into the agreement between the two parties to ensure no confusion as to who is responsible for paying taxes.

They may manage this by adopting a limited company structure. Both contractors and freelancers can maximise their income by adopting different positions in the structure of the company. In the case of a limited company, their income is first paid to the company; they are then able to withdraw the income as a salary or dividend. They can do this either as a shareholder (through dividends) a manager or a salaried employee of the company.

Both contractors and freelancers can be exceptionally useful to growing businesses: they offer expert services with flexibility and reliability while at the same time keeping them off the payroll and thereby reducing your admin burden. However, they do have rights and you do have obligations to both even though they remain off your staff lists.

Paul Beare Ltd is one of the leading accountancy practices focusing on helping overseas businesses set up in the UK and in particular managing the effective recruitment and payment of staff of all kinds. So, if you’re in need of advice or support, we’re right here for all your needs, and you can contact us for help in a number of areas, from tax and payroll to accounting and banking.