An independent contractor is an individual who provides services to another individual, or a business, but is not employed by that individual or business in the traditional sense. Independent contractors may be self-employed, or employed by an agency or umbrella company, which manages their national insurance contributions, payroll and so on. In either case, there are substantial financial benefits associated with being an independent contractor, rather than a traditional employee.
Independent contractors of either type are effectively self-employed, so they can take advantage of a number of tax benefits and deductions. Clothing, equipment, health insurance, home office expenses, telephone bills and travelling expenses can all be claimed, wholly or in part, as tax-deductible business expenses. Of course, independent contractors need to keep records of their income and expenditure throughout the year, for inspection by Her Majesty’s Revenue & Customs, as well as taking care of marketing, sales and other business functions, but this is often a small price to pay for the privilege of controlling how, when and where they work.
Rates of Pay
Employing a traditional employee costs a business far more than the salary it pays that employee, in terms of employer national insurance contributions, employer pension contributions, health insurance and other costs. As a result, it is often more economical for a business to hire contractors and pay them at double the rate, or higher, they pay traditional employees. Furthermore, contractors are typically flexible, highly skilled and used to working on short term projects in a variety of locations, so they can command very high rates of pay. The negative perception of independent contractors as mercenaries, in the eyes of employers and traditional employees, is much less prevalent than it once was and, nowadays, they’re considered a valuable business resource by most people.
Limited versus Umbrella Company
Of course, independent contractors are responsible for structuring their finances in the most tax-efficient way. Financial services provider UC Finance recently estimated that around 50% of the 200,000 contractors currently working for umbrella companies in the UK would benefit substantially from forming their own limited companies. As employees of umbrella companies, contractors need to pay national insurance contributions on their pay as you earn (PAYE) salaries, but as shareholders of limited companies they do not pay national insurance contributions on dividends. This difference, plus other benefits of forming a limited company, could save a typical contractor, earning 350 a day, 10,000 a year, according to UC Finance.
Money Isn’t Everything
Contracting can offer numerous financial benefits, but that doesn’t mean that you should, necessarily, take the highest paying contract that comes along. Remember that the most often cited reasons for becoming a contractor are flexibility and variety, rather than pure financial gain. Most contractors try to take a long-term view, choosing assignments across a range of industries that will allow them to improve their existing skills and learn new ones, so that they continue to be attractive to future clients.
Post on behalf contractor accountants Brookson