Life as a contractor can be very rewarding. Alongside potential higher earnings, you can also experience a wide variety of jobs, and enjoy being your own boss. It isn’t for everyone, but for those who take the leap, most never look back. Here are ten things to consider if you’re thinking about starting up as a contractor in the UK this year.
The outlook for contracting in 2024
At the start of 2024, the outlook remains fairly challenging for would-be contractors.
The April 2021 IR35 reforms made the process of contracting more arduous – for all parties in the recruitment chain. The legislation has shrunk the contracting market and reduced the number of ‘outside-IR35’ contracts available.
Like other industries, the demand for contractors is heavily influenced by the state of the general economy. The higher ratio of candidates to roles has also kept a lid on contract rates over the past few years.
So, the market is competitive and fairly challenging, but skilled IT professionals are always in demand.
Read this guide to work out if contracting appeals to you in general – and if you think you have what it takes to thrive as a contractor.
1. Is contracting for you?
This is probably the most important question of all, as once you have decided to take the plunge, the remaining steps are practical and well-trodden.
To succeed as a contractor, you need to be a self-starter, and willing to take on a degree of risk. You no longer have the comforts of a traditional job, complete with ‘perks’, a regular salary, and other certainties.
However, you have the chance to significantly increase your income, have far more control over your life, and the work you take on. You can enjoy a wide variety of different working environments and industries.
2. Do your research
If you feel you have what it takes to become a contractor, you need to work out
a) whether there is a market for your skills, and;
b) what contract rate you will be able to secure.
The best way to do this is by doing some in-depth online research.
Start with our IT contract rate-checking tool, which uses data sourced from thousands of contract jobs posted on major recruitment sites.
You can also gain a good impression of overall market strength by reading updates on one of the many contractor industry sites and LinkedIn.
You’ll also get more of a feel for your earning power when you start researching possible contract positions and speaking to agencies and other contractors.
3. Finding contract work
Around 20% of contractors work directly for clients. The remaining 80% work via recruitment agencies. However, there are many different avenues you may take before you deal with a recruitment agent.
You may use a contract job board, apply directly to a recruitment agency, get recommended for a position by someone you already know, or even transfer from permanent to contract with your existing employer.
4. Applying for a contract role
To get your first contract, you need to get your CV up-to-date. Contract recruiters are primarily interested in your current skillset and experience.
You should list these at the top of your CV, and keep the document to a maximum of two pages if you can (this is a rough guide).
Be concise, and remember that you’re being hired for your skills, to fill a project requirement. Keep the ‘additional information’ you may have included in your permanent CV to a minimum. Tailor your CV (within reason) to each role you apply for.
You should take time to make the CV presentable; spell check everything and use uniform fonts. You want to make sure your CV stands out from the crowd.
Agents tend to be divided on whether or not you should include a covering letter or not. Our view is that you should do anything to improve your chances of securing the role.
These days, LinkedIn is probably the most important tool in a contractor’s armoury. Set up a profile if you haven’t done so already, and make sure your traditional CV and online profiles match.
More and more recruiters use pre-screening firms to find out more about applicants. So clean up your online footprint if there could be any unflattering information out there about you if you perform a search on your name.
- How to create the ‘killer’ CV
- Our guide to LinkedIn for contractors
- Go to LinkedIn and set up your profile now
5. End of an old life, the start of a new one
Most recruiters want applicants to be able to start a contract role at short notice – often within a week or two.
For this reason, you will be in the strongest position if you have already left your permanent role, or come to an arrangement with your current employer if they support your decision to become a contractor.
There are no strict rules here, and some clients will be prepared to wait for the right contractor to fill a given role.
6. Limited or Umbrella?
Almost all IT contractors work via a limited or umbrella company.
It is very unusual for a contractor to work as a ‘sole trader’, as your agent (or client) will be liable for certain employment rights if you do not work via a company structure.
Most contractors work via their own companies, as it is a tax-efficient way to contract, although the tax benefits have reduced over recent years.
You take on a certain amount of administrative duties, but a specialist accountant can easily carry out most of these on your behalf. Online accounting software like FreeAgent makes keeping on top of your books simpler than ever.
The umbrella company route is the simplest route to contracting. You become an employee of the umbrella company, and they will take care of all your admin, and pay you your net salary each week/month.
However, you will receive none of the tax benefits associated with limited companies.
Since the advent of the Off payroll rules (see below), many clients won’t take on limited company contractors. As a result, you might have to work under an umbrella.
- Which structure is best? Limited vs. Umbrella
- Take time to choose the right contractor accountant
- The typical duties of a contractor accountancy firm
7. Watch out for the IR35 (and ‘Off Payroll’) trap!
Of all the challenges you may face at some stage of your contracting career, ‘IR35’ is likely to be the most challenging.
The IR35 rules tackle so-called ‘disguised employment’. If a limited company contractor works in the same way as a permie – under the control of the client – then HMRC argues that they should be taxed as an employee.
If your contract work is caught by IR35, then your income is taxed as employment income. You will pay significantly more tax if your work is caught by IR35.
Umbrella company contractors don’t need to worry about IR35, as they are already ’employees’ for tax purposes.
As a result of the ‘Off Payroll’ rules, clients (in most cases) determine whether or not a contractor’s work is caught by IR35. Before this date, limited company contractors could self-certify their IR35 status.
The Off Payroll rules hit the public sector in April 2017 and the private sector in April 2021.
Understandably, you should read up on IR35 as a priority, and take steps to ensure that you remain IR35-free. There are plenty of experts out there to guide you through this process, and it is not expensive.
You should have each contract professionally reviewed before signing.
8. Dealing with tax issues
If you go down the umbrella route, your income will be processed in the same way it was when you had a permanent job (via Pay-As-You-Earn, a.k.a. PAYE).
You need to submit your timesheet to your umbrella company, which will then invoice your end-client.
Once payment has been received, the umbrella company will process your payslip, and you will receive a net salary, after deductions for income tax, National Insurance, the umbrella fee, and employment costs.
If you’re a limited company contractor, your accountant will help take care of your company’s tax affairs, although you do need to spend time understanding how everything works.
Ultimately, it is the company’s directors who are responsible for the accuracy and timeliness of its accounts.
As a company director, you have to register for self-assessment, and submit your tax return and pay any tax liabilities by 31st January each year.
Your company pays Corporation Tax on its profits. Employers’ NICs are payable on salaries above a certain threshold.
9. Other practical steps
You could never list all the micro-steps you need to take from the moment you decide to become a contractor to the day you start your first contract in a single article. However, the first 8 steps listed here are the fundamental ones you will follow.
Other things to consider when you’re starting out:
- Take our adequate insurance (most clients require you to have professional indemnity as a minimum).
- Open a business bank account if you’re a limited company contractor.
- Consider setting up a business website.
We cover lots of these topics in further detail here on ITContracting.com, with new content being added all the time.
- Are you adequately insured?
- Tax-efficient life cover paid by your limited company
- Income protection for contractors
10. Being an IT contractor
Most contractors have no regrets over their decision to leave traditional employment. It can be a very rewarding career choice, albeit with several potential challenges along the way.
As a contractor, you’re in control of your future, so make sure you keep in touch with the latest changes in technology, take courses if you need to, and most of all, keep in touch with other contractors.
Other contractors will become your most powerful source of future work if you take the time to network.
Browse the rest of our site for dozens of concise guides, and email us if you’d like to get in touch, make comments, or ask any questions about becoming an IT contractor.
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