How to become a contractor: A step by step guide
Thinking of leaving your full-time gig for the flexibility and freedom of becoming a contractor? There are a few things you need to know before making the leap.
As with any career, contracting has its pros and cons. The good news is, the benefits can include increased earning potential, flexible working hours and greater variety in your day-to-day activities. On the other hand, contracting doesn’t offer the same level of job security as a full-time role and it’s unlikely that you will receive the same perks and benefits offered by a permanent employer.
With all factors considered, if you think this career change is for you, these are the steps you’ll need to take in order to set yourself up as a contractor in the UK.
10 steps to setting up as a contractor:
- Research the regulations and responsibilities surrounding contractors.
- Be prepared to leave your permanent role and set up as a limited company.
- Consider your tax position and understand IR35.
- Decide whether to form a limited company or join an umbrella organisation.
- Register your limited company.
- Set up your bank accounts and choose an accountant.
- Build your contractor CV, portfolio and online presence.
- Start attracting your first contract work.
- Get yourself insured.
- Begin your career as a contractor.
1) Research the regulations and responsibilities surrounding contractors
Before you take any steps to becoming a contractor, it’s essential that you do your research. You need to know that you’re making an educated decision about whether or not this is the right move for you.
Start by thinking about how this set-up would impact your personal circumstances – will improved flexibility in your working hours make life easier, or is this benefit outweighed by the reduced job security? Also, be honest about the kind of worker you are. Have you proven to yourself that you’re a self-starter, with the drive to find new work on a regular basis?
Next, look into the logistics of making this kind of career move to determine how likely you are to achieve success. Is there a demand for contractors in your field with your specialisms and skills? You can gain an idea of the available jobs by having a look at contractor job boards. This will also give you a lot of insight into how you might go about finding freelance work if you choose to pursue this path.
Finally, when entering the complex contractor sector, you need to know the ins-and-outs of business finance. You’ll be in control of every monetary detail of your contractor business, from setting up an account to paying the correct tax. It’s no small detail so know your legal responsibilities.
2) Be prepared to leave your full-time role
You don’t necessarily need to have left your permanent job before you start looking for contract work, but you do need to be available for interviews, and if successful, ready to start the job within a few weeks.
Due to the fast-paced nature of the contracting industry, great opportunities generally won’t stick around for long, so you’ll need to be ready to pursue them quickly.
3) Consider your tax position and understand IR35
IR35, also referred to as ‘intermediaries legislation’, is a set of tax rules that apply to you if you work for a client through an intermediary – an entity that acts as a go-between for the client and contractor and makes arrangements on behalf of the contractor. This can be a limited company or a “personal service company”.
As one of the benefits of becoming a contractor is tax advantages, the IR35 tax rules are in place to ensure that no one takes advantage of companies by disguising themselves as contractors when they should be taxed as a permanent employee.
A breach of IR35 can happen when a company uses contractors with the same responsibilities, controls and benefits of permanent employees. These individuals should not be entitled to a different tax regimen. In the public sector, responsibility for determining your IR35 status lies with the end client. In the private sector, until April 2020, it is the responsibility of the limited company being contracted to do the work to determine whether a contract is inside or outside IR35 (external link). You can check whether you are working inside of IR35 with this employment status tax tool (external link).
Penalties can be significant if HMRC deem you to be working within IR35 (for tax purposes, an employee of your end client) when you have declared that you are not, so it’s vital you seek professional advice if you are operating as an independent contractor.
If your client declares that you are working outside of IR35 (working as a contractor) when paying you for your work, but HMRC hold and investigation and deem this to be untrue, you could also face a huge tax bill and penalty. At this stage you have the right to appeal against the decision, via HMRC’s ‘Alternative Dispute Resolution’ service.
4) Decide whether to form a limited company or join an umbrella organisation
There are two different ways that you can operate as a contractor – as an employee of an umbrella company, or by starting your own limited company and working as a self-employed contractor.
Working for an umbrella company is the simpler route of the two and is ideal for those who want to avoid the administrative side of contracting that comes with running your own limited company. As an employee of the umbrella company, you will be paid a net salary directly from the company on a weekly or monthly basis. While they will take care of the admin, you will not receive the tax benefits associated with independent contractors.
If you work under an umbrella company, you will need to sign the umbrella company provider’s Contract for Services. Further to this, you must advise your umbrella company of the details of your client and contract, and vice versa. The two will then liaise to sign a contract for your services, with the umbrella company as the middle man.
Starting your own limited company can yield a higher take-home pay, making it the most tax efficient option. You can also claim a wider range of expenses.
5) Register your limited company
If you do opt to take control of all aspects of your contractor career and set up as a limited company, you’ll need to register with Companies House and HMRC. You will then receive necessary certification to begin operating and a Unique Taxpayer Reference to begin paying your tax returns.
There are a couple of ways to register with Companies House, you can do so online, by post or with a specialist third party agent. Fees vary between these methods of registration so make sure you know which one is right for you – whether you want to pay £15 for a quick online submission or will need to incorporate the costs of additional support.
For HMRC, the only way to register is online. You must do this within 3 months of setting up as a contractor or risk facing serious penalties.
6) Set up your bank accounts and choose an accountant
When planning the steps to becoming a contractor, you may decide to go down the limited company route. If you do, it may be beneficial to hire a professional accountant.
A specialist accountant can easily assist with the financial administration involved in running a limited company, which can be handy if you would rather not do it yourself or are unsure about tax rules or general employment finance. While this adds an additional cost, many feel that the benefits outweigh the expense, as complications with IR35 that arise from you doing your own accounts can be costly. A specialist accountant will usually cost in the region of £50-150 per month.
When it comes to choosing your accountant, opt for a specialist contractor accountant, as they’ll have a broader knowledge on the requirements of IR35 and other contractor-specific concerns.
Most quality umbrella companies are run by qualified accountants, which can be recommended by recruitment agencies, based on the speed at which they process payments. A good umbrella company generally costs in the region of £25-£30 per week.
7) Build a good contractor CV, portfolio and online presence
In order to prove to potential clients that you’re the one for them – and finally land yourself your first contracting role – you’ll need to ensure your online CV is up to date and is marketing your skills effectively. Due to the nature of contract work where jobs only last for short terms, a contractor CV could be a lot longer than the CV of somebody in permanent employment. Regardless, it is always worth keeping it as brief as possible, perhaps by prioritising your skill set and focusing on the experience you’ve accumulated overall rather than outlining each job individually.
During your initial research, you may have found that the majority of roles being advertised are for a very specific skill set. If that is the case, you’ll want to tailor your online presence and CV to target these opportunities, highlighting relevant experience and employment history.
Of course, for many people investigating how to set up as a contractor, this specific skill set is the reason they feel suited to the role. As most contractor work is done on a project basis, clients are often seeking someone who can advise on and fix a specific issue.
8) Start attracting your first contract work
There are so many ways of landing new contractual work. You can approach prospective clients directly, or you can go via a recruitment agency.
Of course, the reason you’re looking to move into contracting may well be that you’ve already been sought out to assist on a project, or already have a promising contact who wants to bring you in on a new job. If you have a good network of contacts in the industry who may be looking for your services, or know people who are, the direct approach may suit you.
On the other hand, a good specialist recruitment agency will be able to keep you updated on opportunities and help you to secure new contracting roles. It should be noted that when working as a contractor, more people find the majority of their roles through an agency than independently, so it’s worth signing up with a few of the leading agencies to make sure you’re in the mix when new roles come in. A lot of major roles don’t get to the stage where they are advertised, as they are filled by candidates who are already on the books, so it’s worth making yourself known to recruiters.
LinkedIn is also a good tool for finding contractor gigs, both as a way of making your profile visible to recruiters and helping you stay abreast of current job listings. As part of your CV development, take the time to fill in your LinkedIn profile in full, highlighting all your relevant skills and experience.
9) Get yourself insured
If you go down the limited company route, you may want to invest in business insurance to protect yourself financially from the common risks associated with contracting. Specialist contractor policies can combine covers such as professional indemnity and public liability. Professional indemnity insurance covers you for the cost of compensation claims or legal fees if a client were to claim you were negligent or delivered substandard work. Public liability insurance covers you for the cost of compensation claims, legal fees or medical bills if a member of the public were to be injured or their property damaged as a result of your work.
If you join an umbrella company, it is their responsibility to have the appropriate business insurance in place. Employers’ liability insurance is a legal requirement for any business with one or more employees. This form of cover protects employees (and the business) if an employee is injured or falls ill as a result of their work.
Your umbrella company may also choose to have professional indemnity and public liability insurance in place. While this is not compulsory, some client contracts will state that they require umbrella companies to have a certain amount of professional indemnity cover, and it will protect the umbrella company if they ever face a claim for a mistake or accident regarding one of their contractors’ work.
10) Begin working as a contractor
If you have started your own limited company, you’ll need to open a business bank account before you can be paid for your work. As your limited company is a legal entity in its own right, you cannot use your personal account for business purposes. Once you’ve secured your first contract and done all the necessary admin, you can finally get started in your new career as a contractor.
The above insights should hopefully shed some light on what it takes to become a contractor and whether it’s a route you want to take. If you put enough planning and preparation in at the start, you’ll quickly put yourself in a good position to reap the rewards in the long run.