Working as an IT contractor offers flexibility, high earning potential, and the chance to work on projects that align with your skills. But one question often comes up for IT contractors: “Am I considered self-employed?” It’s a question with important implications, especially when it comes to tax obligations, financial planning, and even mortgage eligibility.
In this guide, we’ll explore what it means to be an IT contractor, the different ways you can structure your employment, and how each of these can affect your finances. By the end, you’ll have a clearer understanding of your employment status, and if you’re considering a mortgage, you’ll know the steps to take to secure one tailored to your situation.
What Does It Mean to Be an IT Contractor?
An IT contractor is a professional who offers services to clients on a contract basis. Unlike permanent employees, contractors are typically hired for a specific project or time period, allowing them to work on various assignments with different companies.
While the flexibility is a major perk, the employment status of IT contractors can vary. Generally speaking, IT contractors are considered self-employed, but this isn’t always the case. Depending on the structure under which you operate, you could be classified as a sole trader, a limited company contractor, or even an employee of an umbrella company. Let’s take a closer look at each option.
Types of Employment Structures for IT Contractors
Understanding how you’re classified is essential, as each structure affects your tax obligations, financial planning, and mortgage eligibility differently. Here are the main types:
1. Sole Trader
A sole trader is an individual who runs their business as themselves, without setting up a separate company. As a sole trader, you’re considered self-employed, which means you’re responsible for:
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- Registering as self-employed with HMRC.
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- Keeping records of your income and expenses.
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- Submitting an annual Self Assessment tax return.
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- Paying both income tax and National Insurance.
Sole traders have a relatively simple setup and are taxed based on personal income rates. However, this can limit the types of mortgages you’re eligible for, as some lenders may view sole traders as higher risk due to the variability in income.
2. Limited Company Contractor
Many IT contractors choose to set up a limited company. In this structure, you and your business are legally separate entities. This setup offers certain tax advantages, such as:
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- Taking a portion of your income as salary and the remainder as dividends, which may result in lower tax obligations.
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- Greater opportunities for tax-deductible business expenses.
However, running a limited company also comes with additional responsibilities, such as filing annual accounts and corporation tax returns. For financial planning, being a limited company contractor can provide more options for securing a mortgage, as lenders can assess both your salary and dividend income.
3. Umbrella Company Employee
An umbrella company is a third-party entity that acts as an employer for contractors. As an employee of an umbrella company, you’re technically not self-employed, but rather employed by the umbrella company. This structure:
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- Simplifies your tax obligations, as the umbrella company handles PAYE (Pay As You Earn) tax and National Insurance deductions.
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- Allows you to benefit from employee protections, like sick pay and holiday pay.
However, because you’re considered an employee of the umbrella company, you won’t have the same flexibility as a sole trader or limited company contractor. Umbrella companies can be a good option for those who prefer a simpler setup and don’t want the administrative responsibilities of running a limited company.
Are IT Contractors Self-Employed?
Whether an IT contractor is classified as self-employed depends on the structure they choose. Here’s a quick breakdown:
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- Sole Traders: Yes, you’re self-employed.
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- Limited Company Contractors: Technically, you’re not self-employed; your limited company is its own entity. However, you’re still running your own business.
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- Umbrella Company Employees: No, you’re considered an employee of the umbrella company.
While each structure offers different advantages, they can all impact how lenders view your income and stability, which in turn affects your mortgage options.
How Employment Structure Affects Financial Planning
Choosing the right employment structure isn’t just about tax obligations; it also impacts your broader financial planning and ability to access financial products, like mortgages. Let’s explore how each structure affects different aspects of your finances:
1. Tax Obligations
Each employment structure has unique tax implications:
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- Sole Traders: Pay income tax and National Insurance through Self Assessment.
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- Limited Company Contractors: Pay corporation tax on company profits and personal tax on dividends and salary.
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- Umbrella Company Employees: Pay income tax through PAYE, with tax and National Insurance handled by the umbrella company.
Understanding your tax obligations is essential for financial planning and ensuring you’re meeting legal requirements.
2. Income Stability
Income stability is a key factor for many financial decisions, particularly when applying for a mortgage. Lenders may view your employment structure differently:
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- Sole Traders: Often face scrutiny from lenders due to fluctuating income.
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- Limited Company Contractors: Generally have more options, as lenders can assess both salary and dividends.
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- Umbrella Company Employees: May have access to mortgages similar to traditional employees, as income is more predictable through PAYE.
3. Mortgage Options
When applying for a mortgage, your employment status and income structure will play a significant role in what options are available. Some lenders specialize in mortgages for self-employed individuals and contractors, offering terms that reflect your unique situation.
For instance, as a limited company contractor, you may be able to secure a buy-to-let mortgage by demonstrating rental income alongside your dividend and salary. On the other hand, sole traders might need to provide more documentation to verify income stability.
What Mortgage Options Are Available for IT Contractors?
Just because your income may fluctuate or come from multiple sources doesn’t mean you can’t access a competitive mortgage. Here are some mortgage types and considerations for IT contractors:
1. Residential Mortgages
Residential mortgages are designed for individuals looking to purchase a home. As an IT contractor, you can apply for a residential mortgage by providing evidence of your earnings. If you operate as a limited company, you may need to provide documentation of your salary and dividends over a specified period, typically two years.
2. Buy-to-Let Mortgages
Buy-to-let mortgages are great options if you’re looking to invest in rental properties. Contractors often find buy-to-let mortgages appealing, as they can provide a reliable income source even during gaps between contracts. Lenders may consider both the projected rental income and your overall income stability.
3. Contractor-Specific Mortgages
Some lenders offer specialised contractor mortgages that take into account the unique income structures of contractors. These mortgages can be tailored for those who operate as sole traders, limited company contractors, or umbrella employees, with terms and rates that reflect your financial profile.
Common Challenges Contractors Face with Mortgages (And How to Overcome Them)
Challenge #1: Income Verification
Lenders may require more documentation from contractors to verify income. You can overcome this by preparing tax returns, bank statements, and company accounts well in advance.
Challenge #2: Perception of Unstable Income
As a contractor, you may face higher scrutiny due to perceived income instability. By choosing a lender that understands contractor income structures, you can improve your chances of securing favourable terms.
Challenge #3: Limited Mortgage Options
While some lenders may hesitate to offer mortgages to contractors, many others specialise in this area. A mortgage broker who works with contractors can connect you with lenders who offer tailored mortgage solutions.
How We Can Help You Secure the Right Mortgage
At Premier Mortgage Advisers, we specialise in helping contractors, including IT professionals, find mortgage solutions that align with their unique income structures. We understand that being a contractor offers you the flexibility and freedom you value, but it shouldn’t limit your ability to secure a mortgage on favourable terms.
Our team will work with you to:
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- Understand your income and employment structure.
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- Connect you with specialist lenders who value contractors.
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- Guide you through the mortgage application process, so you’re prepared every step of the way.
Whether you’re looking for a residential mortgage or interested in exploring buy-to-let options, our advisers are here to help. If you’d like to learn more about how we can support you in securing a mortgage as an IT contractor, book a free consultation today.
By understanding your employment structure, you can take control of your financial future and make decisions that align with your goals. If you’re ready to explore your mortgage options, our team is here to make the process smooth and straightforward. Contact us to get started on the path to finding the mortgage that’s right for you.