A Guide to Getting Started as a Contractor
Many people choose to pursue a career as a contractor because of the financial benefits of working for themselves, the increased flexibility and the ability to take control of their career path. If you are considering a move from permanent employment to contracting, then you will need to think about the additional responsibilities which you will have as well as ways to ensure that you meet them.
One of the first things to consider is whether you will work through an intermediary such as an umbrella company, or if you will choose to form your own limited company to work through. A specialist accountant will help you to make the decision, advising you of the advantages and disadvantages of operating as a limited company and providing you with the benefit of their experience to make the best decisions to suit your specific situation.
Whether you are considering contracting, freelancing, starting your own business or becoming a consultant, you might feel as though going it alone is a daunting prospect, but it needn’t be if you have the right support. You will be responsible for managing every aspect of your business, from marketing and selling your services to invoicing, expenses and completing your tax return. Using an accountant is a great way to reduce your workload, especially if you use specialist contractor accountant.
What is a contractor?
Contractors are essentially self employed individuals who work for clients for set periods of time or until a specific piece of work is completed. Usually contractors are paid on either an hourly basis, or a fixed fee for the contract, and the rates for this kind of work are generally considerably higher than they would be for an equivalent position as a permanent employee. Our take home pay calculator can help you to get an idea of the kind of earnings you could enjoy as a contractor and you can compare it to other ways of working to help you make a financially sound decision.
As a contractor, you can enjoy the best of both worlds: your skills and experience will be valued by your client and colleagues, but you will have the freedom to choose your own career path, choose when and where you work and pick assignments that appeal to your preferences of what you want to do.
Why should I become a contractor?
There are a number of advantages to contracting, not least the satisfaction of being your own boss, especially if you work through your own limited company. As a director, you will be able to take advantage of the tax planning opportunities available to businesses meaning that you could save money as well as enjoying a range of other benefits such as flexibility and freedom.
For some, deciding whether to work through a limited company or umbrella company can be difficult, especially if you are new to contracting, as you will need to balance the pressures of dealing with your own admin against the potentially increased earnings of working for yourself. There are a number of benefits to working for yourself, including:
- Contractors usually command rates of at least twice what a full time worker would earn, as compensation for the lack of security, sick pay and holidays.
- Overtime is often available to those who want to earn more and make the most of their contract.
- If you operate as a limited company then you will be able to take advantage of tax planning opportunities to increase your take home pay.
- As a limited company contractor, you are able to claim a wider range of expenses against your income, which can lower your tax bill considerably.
- Working through a limited company is the most tax efficient way of organising your business, which could mean you take home as much as 80 per cent of the value of your contract.
Freedom and flexibility
- Contractors are able to choose when and where they work and take on the contracts that appeal to them.
- Short-term contracts allow you to negotiate your terms whenever you switch contracts to ensure that you are always making the most of every opportunity.
- You aren’t reliant on an annual leave entitlement to have time off, and you can choose to have longer holidays and breaks whenever you want them.
- Switching contracts is much simpler than getting a new job.
- You can pick projects which will allow you to expand your skills and develop your career in the direction that suits you.
- Contracting allows you to control your own career, increase the breadth of your experience and plan your work to suit your other commitments.
What are my contracting options?
For most contractors, there are two options for arranging their work:
Working through an umbrella company
If you work through an intermediary such as an umbrella company, then you are effectively an employee and will operate under their control. This means that they will be paying PAYE tax and National Insurance Contributions on your behalf, so you will have these deducted at source as your wages are processed. Your administrative burden will be significantly reduced, but your take home pay will as well, meaning that you will only take home around 60-65 per cent of your contract value.
Working through a limited company
If you do choose to form your own limited company, then you will be responsible for all your own administration such as paying tax and National Insurance, completing and paying your tax returns and liaising directly with your clients. You can choose which assignments you want to take on and negotiate terms directly to ensure that you are working in the way that you prefer. You will have to deal with your own admin, but many contractors find that using a specialist accountant helps significantly when it comes to dealing with HMRC and making sure that they are making savings wherever possible.
What factors should I consider when deciding to work as a contractor?
If you are considering giving up the security of a permanent role for the freedom and financial benefits of contracting, then there are some things that are worth considering.
IR35 has been making headlines in the contracting world since the legislation was introduced. Although it was designed to ensure that contractors were not claiming tax benefits that they were not entitled to, many people find it confusing and worry that they do not fully understand whether the work they are doing brings them inside the scope of IR35 or not. If you aren’t sure about your IR35 status, then speaking to an expert can help you to ascertain your position.
Setting up your business
Many contractors use an accountant to help them manage their day-to-day finances as well as offering advice on long term planning such as expansion, diversification and pensions. Firms with specialist experience are able to offer invaluable input into your business, using the benefit of their expertise to provide advice on a range of subjects.
How can Nixon Williams help you?
Nixon Williams has over twenty years’ experience in supporting contractors and other independent professionals to achieve their goals. Setting up on your own can be a daunting enough prospect without having to negotiate your way around the vagaries of the tax system without expert advice, but our friendly accountants will help you to manage all your business’s finances.
Our fixed-fee service includes access to a dedicated accountant, who you can contact whenever you need some professional input, information or reassurance about your plans. Contracting can be much easier if you have an expert on your side, so call us today on 01253 362062 or email firstname.lastname@example.org for details on how we could help you.