Life as a contractor can be very rewarding. Alongside potential higher earnings, you can also experience a wide variety of jobs, and enjoy the freedom of being your own boss. It isn’t for everyone, but for those who move away from permanent work, the vast majority never look back. Here are ten things to consider if you’re considering starting up as a contractor in 2021.
The current outlook for 2021
Clearly, at the start of 2021, the outlook (albeit temporarily) is bleak for would-be contractors. The pandemic aside, contractors also face the two-pronged threat of the April 2021 IR35 reforms, plus a drop in demand for contracting skills due to a weak economy and cautious recruitment by end-clients.
However, the contracting market has typically been one of the first to pick up following economic downturns in the past, and once it does, the prospects for the UK’s professional contractors will surely see a dramatic improvement.
1. Is contracting for you?
This is perhaps the most important question of all, as once you have decided to take the plunge, the remaining steps are mainly administrative in nature.
To succeed as a contractor, you will need to be a self-starter, and be willing to take on a degree of risk. You will no longer have the comforts of a traditional job, complete with ‘perks’, a regular salary, and many other certainties.
However, you will 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’ll need to find out a) whether there is a market for your skills, and b) what contract rate you will be able to command.
The best way to do this is by using the wealth of research tools on the web. Start off with our own IT contract rate checking tool, which uses data sourced from thousands of contract jobs posted on the 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. 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 their end-clients, and the remaining 80% work via agencies. However, there are many different avenues you may take before you actually 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 secure your first contract, you’ll 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.
It goes without saying that 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, but our view is that you should do anything to improve your chances of securing the role.
These days, LinkedIn is also a vital tool in the 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 used 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 will 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 (mainly because National Insurance Contributions are not payable on the dividends you draw down from your company). You will have to take on a certain amount of administrative duties, but a specialist accountant can easily carry out most of these on your behalf.
The umbrella company route is the simplest route to contracting – you simply 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.
- 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 trap!
Of all the challenges you may face at some stage of your contracting career, ‘IR35’ is likely to be the most annoying. The IR35 rules, which became law in 2000, were put in place to clamp down on the practice of so-called ‘disguised employment’, where a permie would leave his job one day, only to return as a limited company contractor shortly afterwards; but unlike a ‘self employed’ person, the contractor in question would typically carry on performing a job in an ’employed’ manner – under the complete control and direction of his/her client.
Umbrella company contractors need not be concerned about IR35, as they are ’employees’ of their umbrella schemes. If you run a limited company and your contracts are caught by IR35, the financial consequences are significant, and all the tax benefits associated with working via a limited company will be eroded.
From 6th April 2021 onwards, private sector clients will become responsible for determining the employment status of contractors – in a significant overhaul of the current IR35 rules, following on from the April 2017 public sector implementation.
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 exactly 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, who 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 any other pre-agreed deductions.
For limited company contractors, your accountant will take care of all your company’s tax affairs, although you do need to spend time understanding how everything works.
As a company director, you will need to register for self-assessment, and submit your tax return and pay any tax liabilities by 31st January each year. Your company will also pay Corporation Tax on its profits, and you may have taxes to pay on the salary you draw down.
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. Depending on your own situation, other things you may need to do include; taking our adequate insurance (most clients require you to have professional indemnity cover as a minimum), open a business bank account if you’re a limited company contractor, setting up your own business website, and so on. 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?
- Life cover paid by your own limited company
- Income protection for contractors
- Avoid unnecessary business banking charges
10. Being an IT contractor
As we mentioned at the start of this guide, most contractors have no regrets over their decision to leave traditional employment. It can be a very rewarding career choice, albeit with a number of potential challenges along the way.
As a contractor, you’re in control of your own 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 time to network.
Please browse the rest of our site for dozens of concise guides, and do 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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