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Should contractors opt for self-employed or employed? What are the differences?


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A growing number of people in the UK now work for themselves and it is becoming increasingly common in many industries for businesses to look to contractors and freelancers to fill their roles. Contractors are individuals or companies that provide agreed services to clients for a set fee.  The services are often provided for a set period of time and are normally set out under a contract for services. Contractors can be self-employed or employed by an umbrella company or professional employer organisation and supplied to a client for the duration of a project.

As a contractor you can either work for yourself by setting up your own limited company, where you are responsible for compliance with all company and other statutory issues, including company law requirements to file accounts and returns to Companies House, paying the correct tax and various other statutory and government requirements.  Or you can opt to go with an umbrella company or professional employer organisation (PEO) where they would take care of all accountancy and taxation matters and also deal with all administration matters. There can be advantages and disadvantages to both.

Limited Companies

First of all we can look at limited companies. With setting up your own limited company you have full control over everything. You have complete control over transactions as well as revenue as you are paid directly in to your company bank account, rather than passing through an umbrella company or PEO. As you have direct control over your transactions there is a faster payment and administration process, however the amount of administration and paper work that goes with that is a disadvantage of running your own limited company. It can also be stressful being responsible for the day to day tasks such as invoicing, keeping an accounting system and liaising with your accountant to ensure all forms, returns and accounts are filed by the due dates.

Umbrella Companies and Professional Employer Organisations

If you decide to use an umbrella company or PEO you will avoid the time and trouble of running your own limited company and the admin that goes with that. After a simple set up all you need to do is complete time sheets and forward to your PEO. You don’t need to be involved in VAT returns, payroll matters and taxation as this is all taken care of. This is particularly good for short term contractors as you don’t have the costly process of setting up your own limited company and then arranging for it to be dissolved once you have stopped contracting. However, for contractors earning revenue outside IR35 there is a higher tax burden than using a limited company due to the Managed Service Company legislation (introduced in 2007).

Some contractors prefer using an umbrella company or PEO, while others would rather set up their own limited company and what you decide to go for will depend on a variety of factors. Consider your attitude to administration including dealing with forms, returns, VAT returns, correspondence with accountants and other third parties etc. If you don’t find this a problem then the limited company route would suit you, but if it’s likely to be a problem then the limited company route is not for you. The length of how long you will be contracting for is also something worth considering. If it is a fairly short term contract then an umbrella company is preferable as you save the hassle of setting up your own limited company which is only needed for a short period of time. If this is your first time as a contractor and you are undecided whether to go with your own company or an umbrella or PEO then I would suggest going with the latter. If you then wish to set up your own limited company later on then that is possible, however it is much harder in terms of administration and expense to go from your own company to an umbrella or PEO.

How TCP can help?

TCP is a European Professional Employer Organisation and compliance specialist with over 20 years’ experience. Our expertise lies in the employment of skilled temporary/contract workers on behalf of clients across 12 European countries. We are always aware of changes in legislations in all countries we operate, meaning we can provide the most suitable solutions per contractor.

If you are a contractor TCP Solutions can help. When employed by TCP Solutions, as a contractor you don’t need to take on any responsibilities such as ensuring accounts and tax returns are submitted on time and the correct amount of tax is paid, as this will be done by us. We are also able to provide Visa sponsoring in most of the countries we operate (except the UK).

Would you like to know more? Please contact our sales team on +44 (0)208 580 0800 or send us a message via our contact page.