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Fact sheet 4 – Contracting

1. What is a contractor?

One definition of a contractor is, “a person or firm that undertakes a contract to provide materials or labour to perform a service or do a job.”

A contractor is partway between a freelancer and an employee. You’re not tied down by an employment contract, but your assignments are normally longer and more secure than freelance arrangements.

Similar to freelancers, contractors are self-employed and aren’t entitled to sick or holiday pay. You can be taken on as yourself, via a recruitment agency or your own Limited Company.

2. Which business models can you use as a contractor?

You can trade as yourself (eg Joe Bloggs) or you can trade as a Limited Company (eg Joe Bloggs Ltd).

Here’s the business models you can consider:

  • Sole trader – a self-employed person running the business as an individual.
  • Limited Company – a limited liability structure that you can set-up to run your business and hold responsibility for financial and legal decisions.
  • Umbrella company – an intermediary between a contractor and their client, which handles the admin side of contracting, such as collecting invoice payments, deducting Income Tax and National Insurance Contributions and giving the rest to you.

3. What are the advantages of each business model?

Each business model has its unique set of advantages:

Sole trader 

  • Less paperwork.
  • Easier accounts.
  • Privacy (there’s no need to file public accounts).

Limited Company 

  • Limited liability.
  • Higher (potential) profits.
  • Good borrowing power.

Umbrella company 

  • Simplicity. 
  • Lack of commitment.