Independent Contractor definition
Independent contractors are self-employed individuals who provide work under a contract for services. For legal and tax purposes they are not classified as employees. Independent contractors typically have specialist skills or knowledge that is required on a fixed-term basis. They also provide their own tools and equipment.
Contractors must be careful that they are legally classified as contractors as certain contract provisions could mean they are employees – HMRC’s IR35 tax legislation, introduced in 2000, means that some contractors are taxed at much higher income tax and national insurance rates than others.
Commonly-cited advantages of working as an independent contractor include relative freedom to set workload and business rules and not having to report to a superior. Independent contractors are also free to build a network of businesses and work for a variety of companies, barring any non-competing clauses in their contracts. Another significant advantage is independent contractors will typically own the copyright to any works created in the line of duty, whereas employees generally give up this right.
Disadvantages of being an independent contractor includes the lack of rights and benefits associated with being classified as an employee, such as contributory pensions. Contractors are also responsible for their own tax affairs and must submit accurate returns to HMRC.
For HR, independent contractors can provide additional resource when needed without the financial burden of permanent employment, however they are typically more expensive than employees and have more bargaining power because (most of the time) they will have a roster of other clients. The tax framework of working with independent contractors may also be more complex than PAYE.