How to Become a Contractor

Are you considering taking the leap into the world of contracting in the UK? Becoming a contractor offers flexibility, autonomy, and potentially higher earnings than traditional employment. In this comprehensive guide, we'll walk you through the essential steps and considerations to embark on this exciting journey.

A contractor is an individual who provides services to clients on a temporary basis, typically through a limited company or as a self-employed entity. Unlike permanent employees, contractors work on specific projects or assignments for a predetermined period. They often have more control over their work schedule, projects, and clients.

What Do Contractors Do?

Contractors offer specialized skills and expertise in various industries such as IT, engineering, construction, marketing, and finance. They may work independently or as part of a team, delivering specific services or completing projects for clients. Common tasks include project management, consultancy, software development, design, and more.

You Want Work Felexibility

Contracting offers more flexibility compared to traditional employment. Contractors often have more control over their work hours, projects they take on, and the duration of their contracts. This flexibility can be appealing to individuals who prefer autonomy and variety in their work.

You Want to Increase Your Pay

You’d like to increase your pay by switching from permanent roles to interim/ contractor roles. Contractors typically earn higher hourly rates compared to permanent employees.

Contracting can be very lucrative.

You’ll need to be comfortable with a certain level of risk (short notice periods), increased monthly admin (as a Limited Company) and less benefits than being an employee (paid leave, sick days).

However, you’ll earn more, get greater flexibility and hopefully grow a consulting business.

Variety of Projects

Contracting allows individuals to work on a variety of projects with different clients. This variety can be intellectually stimulating and provide opportunities for skill development and networking.

Setting yourself up as a contractor through a Limited Company means you can start expanding your client base rapidly and work on different projects a few days a week.

You can still set this up as a current PAYE employee of a company, and this can be a great stepping stone to launching your own business.

Work-life Balance

Some individuals choose contracting to achieve a better work-life balance. Contracting can offer the flexibility to take breaks between contracts or to work remotely, enabling individuals to better manage their personal and professional commitments.

Skill Development

Contracting can provide opportunities for skill development and career advancement. Working on diverse projects with different clients can broaden one's skill set and experience, making contractors more attractive candidates for future roles.

Market Demand

In certain industries or sectors, there may be high demand for contractors due to specific skills shortages or the need for temporary expertise on projects. This demand can create favorable conditions for individuals considering contracting.

Independence

Some individuals are drawn to contracting because it allows them to operate as independent professionals and entrepreneurs. They enjoy the challenge of managing their own businesses, marketing their services, and building relationships with clients.

Tax Efficiency

Contracting offers various tax advantages, including higher retention of earnings, tax deductions for business expenses, lower tax rates on dividends, flexibility in pension contributions, opportunities for capital gains tax planning, and utilization of tax planning strategies to minimize overall tax liabilities.

1. Set Up Your Business Structure

Decide whether to operate as a sole trader, limited company, or umbrella company. Each structure has different legal, financial, and tax implications, so research carefully and choose the option that best suits your needs.

Depending on how much research you’ve done then you may have started hearing terms like IR35, Umbrella Company, Limited Company, Sole Trader and more.

It’s a minefield!

When I first started contracting I found it confusing trying to figure out which route to take. 

My personal belief is that people make it overly complex. Perhaps intentionally. You’re more likely to overpay for a service if you don’t understand the nuances (I did).

So, I’ll keep it simple.

Sole Trader or Self Employed

Best For: Small projects outside of a regular PAYE role.

If you work as a freelancer on the side from a Permanent PAYE role and make under £25k a year doing this, then you can operate as a “Sole Trader”.

As an example, if you wanted to start earning some additional income from your regular PAYE role and started doing small projects on UpWork (or similar platforms) then you could just take payment into your personal account.

You don’t need to set up a company to do this, but you’ll need to keep track of your income and file a Self Assessment tax return at the end of each tax year.

Advantages of Sole Trader Structure:

• Simple set up
• Can claim a limited number of tax deductible expenses

Disadvantages of Sole Trader Structure:

• Need to keep track of income to report to HMRC
• Annual Self Assessment Tax Return filings each year
• Not accepted for any moderately sized company or contractor project roles

Umbrella Company

Best for: Contractors who want to keep things really simple and earn a regular PAYE income.

An umbrella company will sort out your pay, income tax deductions and National Insurance. 

Essentially, they act as an intermediary between you and your client. You typically fill in a timesheet with the amount of hours worked during the last week/ month (depending on payment period). They then invoice your client ,and sort out all your tax and pay you as a PAYE employee.

You won’t have to worry about admin but you’ll have to worry about umbrella fees and you won’t be maximizing your earnings.

Advantages of an Umbrella Company:

• All paperwork and filing requirements are taken care of.
• May include personal indemnity insurance.

Disadvantages of Umbrella Company:

• National Insurance and PAYE are deducted before you get paid.
• Admin fees can vary from a percentage to a fixed cost.
• There are some really poor quality Umbrella firms

Limited Company

Best For: projects outside of IR35 (we’ll get to that in a second), invoicing multiple clients easily and tax efficiency.

Advantages of a Limited Company:

• Professional image and ability to take on multiple clients
• Tax efficiency due to tax deductible expenses & payment through dividends
• Limited liability if something happens to the company

Disadvantages of Limited Company:

• Filing and reporting requirements - especially with VAT registration
• Reduced privacy - other people can find details about you and your company on Companies House.

2. Register Your Business

Do you feel ready to start your Limited Company?

Here’s 3 ways to do it:‍

• ‍Companies House: For £50 you can register your company on Companies House here.
• Formation Agent: From £50 to £99 you can find a formation agent to do it for you with a few added services – see registered agents here.‍
• GoForma: we provide free registration with all our Accountancy and Virtual Office packages here.

3. Set Up Your Finances

Open a Business Bank Account:

A business bank account is a mandatory requirement if you have a Limited Company. Given that your business is a legal separate entity from yourself, you have to report your income and transactions through this account.

We've done extensive research to put together an article comparing the best business bank accounts, including testing the sign up process for newer challenger banks like Starling, Tide, Revolut, Mettle and Metro.

Spoiler: Metro has a terrible (and manual) onboarding process that requires you to go into a branch. A lot of accountants tend to recommend it though.

Why? They get a generous kickback for each client they refer.

Hire Contractor Accountants:

Consider hiring a contractor accountant to manage your accounts and taxes.

Things to look out for:

• Trustpilot Reviews: There are shocking stories of missed deadlines, hidden costs and terrible customer service from companies. Before finalizing your decision, research the reputation and credibility of potential accountant firms. Platforms like TrustPilot offer valuable insights through client reviews and ratings, providing firsthand experiences that can help gauge the quality of service and reliability of the accountant.
• Hidden Costs & Minimum Terms: Analyze the accountant's fee structure thoroughly to identify any hidden costs or unexpected charges that may impact your budget. Some accountants will lock you into a 6 month minimum term and others may charge you for cancellation.
• Level of Support: Assess the level of support offered by the accountant beyond basic financial management tasks. A responsive and proactive accountant who provides personalized advice, strategic planning, and ongoing support can significantly enhance the value they bring to your business. Clarify the availability of support channels, such as phone, email, or in-person consultations, to ensure timely assistance when needed. It's good to ask questions like do they have a team inbox? Do you know who your accountant is? How can you contact them?

We take care of absolutely everything you need in simple monthly packages.

Get all you filing requirements, accounting software, dedicated accountant, partner discounts, tax advice and company registration with our packages. We provide support through bookable calls, online chat and even over text (SMS)—which few other providers do.

With prices starting at £59/month, you can check our contractor accounting packages.

Accounting Software:

Beware of bespoke accounting software created by an accounting firm.

The largest small business accounting firms in the UK come nowhere close to the features, scale and support that is available with premium accounting software and they are more focused on acting as accountants rather than software developers.

There's been an incredible amount of innovation and change in accounting software in the last few years, and you can see how these companies are struggling to keep up to date with features.

Personally, I used software that was created by an accounting firm and half my time was spent calling them up after there were bugs with the software, I received incorrect notifications or their support documentation was useless.

After a significant amount of testing we have one recommended software for contractors:

FreeAgent:

Pricing: £16.50 for 6 months then £33 a month.

Unlike Xero and Quickbooks, FreeAgent just has one package for Limited Company accounting.

This is hands down the best in terms of a simple user experience, packed with features, unlimited invoices, great mobile app and clear deadlines and metrics around what you have coming up (VAT, Corporation Tax) and how much you need to pay.

We include this within our package pricing (starting at £59/mo) or if you have a NatWest, RBS or Mettle business bank account, you can get this for free and we'll give you a £10 discount on your package.

4. Understand Tax Obligations

VAT - Do You Need It?

The current VAT threshold in 2024 is £90,000 and the VAT rate is 20%.

It’s easy to register but does require quarterly filing, so don’t register until you’re ready. Deregistration can get a little tricky so it’s easier to wait until you’ve confirmed this.

You'll need to register for VAT within 30 days of meeting any of these conditions:

• Your taxable turnover exceeds £90,000 within a 12-month period.
• You expect your taxable turnover to exceed £90,000 in the next 30-day period.
• Your business had a taxable turnover exceeding £90,000 over the last 12 months.
  

Once you’re VAT-registered, you’ll then need to add this charge into your services and keep track of the amount owed.

Advantages of Registering for VAT:

• Enhances business perceptions: Registering for VAT tends to lend credibility to your business, and makes your company appear larger and more established.
• You can reclaim VAT: You can reclaim VAT on goods and services you've purchased from other businesses

Disadvantages of Registering for VAT:

• Administration Burden: You’ll need to file quarterly VAT returns, keep good VAT records and pay VAT on time otherwise you’ll get penalties.
• Services become more “expensive”: For non-VAT registered businesses your services can become more expensive.

IR35

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IR35 is a piece of legislation that requires companies to crack down on contractors who are “disguised employees”. Meaning, their role is identical to a regular employee. 

There have been instances where contractors worked in the same role for 2 or more years which made HMRC question - why aren’t they employees?

Inside IR35 = you are paid the same as a regular employee.
Outside IR35 = you pay yourself how you like.

Working as a contractor through a Limited Company can be considered tax efficient because you can structure your company in a way where you reduce your:

• National Insurance contributions by paying a salary below a certain threshold
• Income Tax by paying yourself through Dividends rather than salary (these are taxed differently)
  

Working Outside IR35

There’s a few conditions you need to be able to say apply to you:

• Exclusivity: you have more than one client
• Role flexibility: you can choose or have flexibility on where you work or when you work.
• Substitution: there is a clause in your contract that allows you to identify someone else who can do your tasks if needed.
• Equipment: you use your own equipment for the job (sometimes this isn’t feasible though with certain security risks).
• Termination window: you have a short or immediate termination window
• Benefits: you don’t receive paid leave or sick pay from your client. You should also have your own insurance.
  

There are a lot of nuances in IR35. We’ve put together a comprehensive IR35 guide to help you navigate these nuances.

Does an Umbrella Overcome IR35?

Simply put, no. There’s no real point in operating under an Umbrella Company, who will charge an administration fee, when you’re getting paid as a regular PAYE employee.

You’ll save more by just being a regular PAYE employee at your current company.

5. Additional Business Requirements

Obtain Necessary Insurance

Depending on your client contracts and the type of work you’re doing, your insurance requirements can vary significantly.

Some contracts may include stipulations for a certain minimum threshold of professional indemnity cover (typically £1 million) whereas others may not require this.

We have a great partnership with Superscript where you can get 10% off your business insurance.

Again, we've compared pricing, service quality, onboarding processes and features (monthly agreement and range of cover you can add and remove) and think Superscript have the best options on the market.

6. Find Opportunities

Update your LinkedIn

Once you get into contracting, it’s important to start brushing up your LinkedIn profile.

Getting endorsements, writing posts, commenting on posts and expanding your connections is a great way to get your services and profile out there.

You need to think about how to continuously build out your pipeline of projects.

We take it so seriously, we ran our own experiments on how to create a top 1% profile on LinkedIn.

Sign Up to Consulting Platforms

We put together an ultimate article on 22 Best Job Sites for Contractors.

We are currently building out opportunities on our platform (we're the only contractor specialist to do this in the UK), where you can find specific contractor roles from a variety of different platforms and recruiters.

Network with Interim Recruiters

Typically I’ve found contractor roles by developing good relationships with a range of recruiters.

Recruiters like to be taken out for coffee too, so do your own business development and start establishing strong connections and building a reputation with recruiters.

Find a Community

There are some great community newsletters and groups for contractors.

We're currently building a community platform but there are some great ones out there too!

From more specialist contractor websites like IT Contracting to more general sites like Contractor UK, Contractor Weekly or Contractor Eye - you’d be surprised by the level of support available.

Of all of the contractor sites, Contractor UK definitely has the most active forum.

MeetUp groups can also be a good way to tap into the contracting community although this has been limited during C-19.

There are also a range of LinkedIn groups you can join which can help connect you with the community.

• Consulting, contract and freelance goals
• Contractor Advice UK
• Contractor lead generation forum

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Embarking on a contracting journey in the UK can be both rewarding and challenging. By following above steps and leveraging the expertise of contractor accountants, you can understand the process with confidence and set yourself up for success. Remember, contracting offers unparalleled opportunities for growth, autonomy, and financial prosperity. So, take the plunge, and embrace the exciting possibilities that await you as a contractor in the UK!