Independent contractors, consultants, and freelancers are self-employed persons who work for firms on a temporary basis. Hiring contractors allows businesses to have access to specialised skills, expertise, and experience without committing to a full-time employee. This is frequently quite enticing.

if you wish to be a contractor, you must first decide the legalised or legal structure you will use for your firm, as well as which accounting services for contractors you will require.

The legal structure you pick influences how much tax you pay, how you operate your business, and what documents you must preserve. You essentially have three major alternatives, as with most new businesses:

  • Choose a limited liability firm
  • Become a lone trader
  • form a partnership

Operating as a sole trader

In terms of tax and administration, operating as a contractor as a sole trader is the most straightforward option. There will be no need to register with Companies House. This means you won’t have to file yearly accounts, and you’ll just have to perform a little administrative work before you get started.

When you choose to run your contractor company as a sole trader, you and your company are legally one and the sea. This implies you may keep all profits after paying taxes because there is no distinction between the business and yourself.

However, you are responsible for the companies liabilities and debts. You are legally and financially responsible if the company runs into problems.

Paying tax as a sole trader contractor

As a sole trader, you must register with the HMRC and self-assessment and file a tax form each year. Maintaining precise records of your company costs and revenue will assist you in paying the correct amount of tax, as well as allow you to claim some expenses.

When operating your contractor business as a single trader, you may be required to pay fix-rate class 2 national insurance contributions (NICs) and Class 4 National Insurance Contributions on profits.

Paying tax as a sole trader contractor

As a sole trader, you must register with HMRC for self-assessment and file a tax form each year. Maintaining precise records of your company costs and revenue will assist you in paying the correct amount of tax, as well as allow you to claim some expenses.

When operating your contractor business as a single trader, you may be required to pay fixed-rate Class 2 National Insurance Contributions (NICs) and Class 4 National Insurance Contributions on profits.

Operating as a contract with a limited company

Limited liability corporations (LLCs) are legal entities distinct from their owners and directors. You are not legally liable for the company’s obligations or liabilities, but any earnings remain the companies property.

To be in trading, you must first register with Companies House as a limited company. Incorporation is the term for this procedure, which is explained in further depth in the video below. To begin, a limited company must have at least one director and must file yearly accounts with companies house.

National Insurance and limited companies 

Depending on the salary you take, you might need to pay CLASS 1 NI as an employee, whilst the company pays Class 1 NI as an employer.