- A contractor is someone in business on their own account who provides services to clients under a contract, rather than working as an employee.
- Contractors usually operate either as a sole trader or through their own limited company, and each route is taxed differently.
- Your IR35 status depends on how you actually work, not your job title, and it decides how your income is taxed.
A contractor is someone who’s in business on their own account and provides services to clients under a contract, rather than working as an employee. You decide how the work gets done, you invoice for it, and you handle your own tax.
Most UK contractors work either as a sole trader or through their own limited company. Your setup affects how you’re taxed, what you can claim, and how the inside vs outside IR35 rules apply to you.
That last point trips people up more than any other.
What is a contractor?
A contractor is a self-employed individual or business that agrees to deliver a specific job or service for a client under a contract. You’re not on the client’s payroll, and you’re responsible for your own tax and National Insurance.
HMRC treats you as self-employed if you run your business for yourself and take responsibility for its success or failure. In practice, you’re probably a contractor if you bid or quote for work, invoice for what you’ve done, aren’t under day-to-day supervision, and don’t get holiday or sick pay.
The word “contractor” covers a lot of ground. An IT contractor on a six-month engagement, a builder taking on a kitchen refit, and a freelance marketing consultant are all contractors, even though their work looks nothing alike.
How is a contractor different from an employee or freelancer?
The difference between a contractor and an employee comes down to how you actually work, not the label on your contract. Courts and HMRC look at what happens day to day, so calling someone a contractor doesn’t make them one if they’re treated like staff.
Three tests usually decide it: control (who directs how, when and where the work is done), personal service (whether you have to do the work yourself or can send a substitute), and mutuality of obligation (whether there’s an ongoing duty to offer and accept work).
Contractor vs employee at a glance
Feature | Contractor | Employee |
Pay | Invoices per project or day rate | Salary through PAYE |
Tax | Handles own tax and National Insurance | Deducted at source by employer |
Holiday and sick pay | None | Yes |
Control over work | Decides how work is done | Directed by employer |
Substitution | Can often send a substitute | Must do the work personally |
Is a freelancer the same as a contractor?
Freelancer and contractor describe the same underlying status, so the difference is mostly about convention rather than law. Both are self-employed people selling their services, and both handle their own tax.
In everyday use, “freelancer” tends to suit shorter, project-based creative work, while “contractor” often means longer engagements in fields like IT, engineering or construction. HMRC doesn’t draw a legal line between the two. If you want the tax detail, our guide to freelance tax breaks down what you’ll actually pay.
How are contractors taxed in the UK?
How you’re taxed as a contractor depends on your structure, and the two main routes are sole trader and limited company. Both pay tax on profit, but the mechanics and the rates differ.
As a sole trader, you pay Income Tax on your profits through Self Assessment. For 2026/27 the personal allowance is £12,570, then you pay 20% up to £50,270, 40% up to £125,140, and 45% above that. You’ll also pay Class 4 National Insurance on profits above the threshold. Our guide to sole trader tax walks through the full picture.
Through a limited company, the company pays Corporation Tax on its profits, and you draw money out as a mix of salary and dividends. This can be more tax-efficient at higher profit levels, but it comes with more admin and filing.
Do contractors need to register for VAT?
You must register for VAT once your taxable turnover passes £90,000 in any rolling 12-month period, whichever structure you use. The threshold is unchanged for 2026/27, and it’s measured on a rolling basis, not the tax year.
Plenty of contractors register voluntarily below that figure to reclaim VAT on purchases, especially if their clients are VAT-registered businesses.
Keep a running total of your last 12 months' turnover, not just the current tax year. The VAT test resets at the end of every month, so it's easy to cross £90,000 without noticing if you only check at year-end.
What is IR35 and why does it matter?
IR35, or the off-payroll working rules, exists to stop people working like employees but paying less tax by billing through their own company. If your engagement falls “inside IR35”, your income from it is taxed roughly as employment income.
The rules use the same core tests as employment status: control, personal service and mutuality of obligation. HMRC’s CEST tool can help you assess a single engagement, though it doesn’t cover every situation.
Being inside IR35 doesn’t give you employment rights like holiday or sick pay. It only changes how you’re taxed, which is why status matters so much. For the practical detail on where an engagement sits, see our guide on the cost of contractor accounting and how specialist support pays for itself.
Which structure should a contractor choose?
Choosing between sole trader and limited company comes down to your profit level, your appetite for admin, and how your clients prefer to engage you. Neither is automatically better.
- Start with your expected profit. At lower levels, a sole trader setup is simpler and often just as tax-efficient.
- Weigh the admin. A limited company means annual accounts, a Corporation Tax return and Companies House filings.
- Check client requirements. Some agencies and end clients will only engage contractors who work through a limited company.
- Factor in liability. A limited company gives you limited liability; a sole trader is personally liable for business debts.
If you’re weighing the numbers, our comparison of sole trader vs limited company tax lays the two routes side by side. The UK tax brackets for freelancers guide is worth a look too if you’re still deciding.
How Sleek helps with contracting
Getting your status, structure and tax right from the start saves a lot of pain later. That’s exactly where a compliance-first accountant earns its keep, especially once IR35 and VAT enter the picture.
Sleek’s contractor accountant service covers the setup, the filing and the ongoing questions, so you’re not second-guessing your status every time you sign a new contract. If you want the wider picture, our accounting services cover everything from bookkeeping to year-end.
Disclaimer: The preceding information is not legal advice. This content is aimed to provide general guidance. For more formal or legal advice, contact Sleek directly.
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FAQs on what a contractor is
Can you be a contractor and an employee at the same time?
Yes. You can hold a PAYE job and contract on the side, and HMRC treats the two separately. Your employer deducts tax on your salary, while you report your contracting profit through Self Assessment. Just keep clean records for each, because the two income streams still combine to decide your overall tax band for the year.
How do I become a contractor in the UK?
Start by deciding your structure, then register accordingly. Sole traders register for Self Assessment with HMRC, while a limited company route means incorporating at Companies House. From there you’ll set up business banking, sort insurance, and agree contracts with clients. Many new contractors bring in an accountant early to get the setup right and avoid backtracking later.
Do contractors get holiday pay or sick pay?
No. Genuine contractors are self-employed, so they don’t receive holiday pay, sick pay, or a workplace pension from clients. Your day rate or project fee has to cover the days you don’t work. This is one of the clearest markers HMRC uses when separating a real contractor from a disguised employee, so it matters for status too.
What insurance does a contractor need?
It depends on your field, but professional indemnity and public liability cover are the most common. Many clients and agencies won’t sign a contract without them. Some sectors need extra cover, such as employer’s liability if you take on staff. Check each contract, since clients often specify minimum cover levels before work can begin.
Does a contractor need to submit a Self Assessment tax return?
Yes. Sole trader contractors report profits through Self Assessment, and company directors usually file one too. You’ll need to register with HMRC and keep records of income and allowable expenses. You can check whether you need to file using the GOV.UK Self Assessment checker, which walks through your circumstances in a few questions.
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Can a contractor work for just one client?
Yes, but it raises the risk of being seen as an employee for tax. A single long-running client, full-time hours, and close direction all point towards employment rather than genuine contracting. HMRC and the courts look at the substance of the relationship, so working for one client isn’t fatal on its own, but it’s a factor worth watching.
What expenses can a contractor claim?
Contractors can claim costs incurred wholly and exclusively for the business, such as equipment, software, travel to temporary workplaces, and professional fees. Sole traders and limited companies have slightly different rules on what’s allowable. Keeping receipts and clear records is essential, because HMRC can ask you to back up any expense you’ve claimed against your profits.
