18 classic IT contractor mistakes, and how to avoid them

A successful contractor career requires navigating some tricky situations (and people). You’ll need to negotiate with recruiters and clients, stay on top of your accounts, and keep on the right side of the taxman.

Here are some classic mistakes to avoid as an IT contractor.

For a broader overview, see our guides to IR35, contractor expenses, and limited vs umbrella.

1. Make hay while the sun shines

The health of the contracting market – like so many others – reflects the health of the general economy. There have been boom times – particularly in the 2000s and 2010s – as well as slumps.

When the going is good and contract work is plentiful, use these times to consolidate your rainy-day fund. Even if you are highly skilled, you could always find yourself on the bench for a while.

Gaps between contracts have become more common in recent years, particularly following IR35 reform, making it more important than ever to maintain a financial buffer.

There is no magic formula, but many contractors aim to have at least 6 months’ earnings in the bank to cater for this eventuality.

2. Don’t start work without a contract

If you’re not in receipt of a signed contract (as a contractor) or other written agreement (for freelancers), don’t start work.

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Make sure the client, the agency (if applicable), and you are fully aware of the terms of the contract (duration, location, rates, etc.) and that all terms are in writing.

Disputes can easily arise in the absence of a signed agreement, and you cannot rely on an oral agreement, as any party can dispute what may have been agreed. Read this legal view for further information.

3. Thinking you’re an accountant as well as a contractor

If you work via your own limited company, any paperwork concerns you have will soon disappear if you hire an accountant.

Some contractors have the expertise and time to do their own company accounts. But in our experience, they make up a very small minority.

If you get your accounts wrong or miss your company’s statutory deadlines, you could be faced with penalties, fines, and a lot of unnecessary contact with HMRC. Here’s our list of over 20 leading accountants.

4. Being unrealistic about your annual earnings

If you estimate that you can earn £400 per day, how much do you think you’ll take home (turnover) in the average year?

Before you multiply your daily rate by 5 and then 52, it’s time to be realistic.

You need to factor in public holidays (8 days), holidays (say 20 days), contingency for other types of absence due to illness, or random events (say 7 days), and you’ve already reduced the weeks you might work to a mere 45.

And even then, what about the time between contracts?

Don’t forget to factor in the costs of working for yourself – see (10).

5. Using an offshore tax avoidance scheme

Broadly speaking, there are only two ways to contract: via your own company or via a PAYE umbrella company.

Unfortunately, some contractors continue to be seduced by the wild take home pay claims of ‘tax planning schemes’.

What may seem like an attractive proposition today could become a nightmare in a few years’ time.

HMRC has taken a tough approach to individuals who use tax avoidance schemes, including the Loan Charge. Many schemes are now under active HMRC investigation. If you are tempted, you could face significant penalties and years of stress.

6. Burying your head in the sand over IR35

You pay significantly more tax if your contracts are caught by IR35.

The Off Payroll rules, which took effect in April 2021, mean that responsibility for determining IR35 status often rests with the client. Many organisations now take a cautious approach, sometimes treating roles as inside IR35 by default.

As a minimum, submit your contracts for a professional review of the working practices. For peace of mind at a modest price, take out an IR35 insurance policy.

7. Spending your company’s money

A limited company is a legal entity in its own right, and its funds are not ‘owned’ by its directors.

When you draw down income from your company (in the form of dividends), make sure that the company has sufficient retained profit to cover any payments. You face penalties and the attention of HMRC if you make ‘ultra vires’ distributions.

Your company also needs to set aside funds for any future liabilities for Corporation Tax and VAT. Corporation Tax is now charged at different rates depending on profit levels, so planning ahead is essential.

Consider investing these funds in a savings account to earn interest before you need to pay HMRC.

If you use accounting software such as FreeAgent or Xero, you can always see a snapshot of your company’s finances.

8. Embellishing your CV / LinkedIn profile

In the past, many of us have beefed up an uninspiring entry on a CV or exaggerated our competence in one skill or another.

However, for those considering something more drastic, be aware that many recruiters use pre-employment screening companies to vet potential job applicants.

Make sure all versions of your CV match too – online, offline, and on LinkedIn. Otherwise, you may risk potential embarrassment or awkward questions. Find out more in our contractor CV guide.

9. Not tailoring your job applications

Are you guilty of firing off identical applications for potential contract job openings?

Sure, it may not be the most inspiring part of a contractor’s work lifecycle, but an uninspired generic application may well draw an equally uninteresting response from clients.

10. Who’s paying for your perks now?

Once you start contracting, you may realise how pampered you were in your past life as a permie.

Once you are on your own, your company will need to cover the costs of running a business.

Expenses include contributing to a pension scheme, professional indemnity cover, and insurance in case you fall ill and are unable to work.

11. Running out of cash

The number one reason small businesses fail has remained the same for generations: they run out of money.

Not necessarily because they are not viable, but because they don’t keep on top of their cash-flow management.

Running a contracting business is no different.

If, say, two invoices in a row become late, you could face financial problems.

Use an online accounting system, such as FreeAgent or Xero.

These tools let you invoice clients, track cash flow, and identify late payments early. See our guide on late payments.

12. Being precious about job offers

As a contractor, you may not always be able to be too picky about the roles you apply for, particularly in quieter markets.

You’re unlikely to find a ‘perfect’ role in terms of skillset, industry, rate and location, so some flexibility is often required.

13. Claiming illegitimate expenses

The rules governing the expenses you can claim are complex, so you should tread carefully and consult your accountant if you are unsure.

For a business expense to be legitimate, it must be incurred solely and exclusively in the course of your trade.

Expenses should not have a duality of purpose. For example, you can’t claim anything that benefits you as an individual, e.g., a gym membership.

You generally cannot claim for costs you would incur anyway, such as standard home broadband, unless there is a clear additional business cost. Find out more in our guide to business expenses.

14. Being unprepared before an interview

Although contractor interviews are less intense affairs than those you attended as a permie, there is no excuse not to prepare in advance.

15. Hiring an accountant from your agent’s shortlist

Many recruitment agents suggest you choose an accountant (or umbrella company) from a shortlist of providers.

They may be fairly forceful in their recommendations too.

Novice contractors can hardly be blamed for choosing a service provider in this way, but the shortlist may not necessarily provide the right accountant for you.

16. Poor record-keeping

The biggest complaint we hear from accountants about contractors relates to record-keeping.

Even with the best accountancy software and most qualified experts in place, a company’s accounts are only as good as the data provided.

17. Missing your tax and filing deadlines

It may surprise you, but if you’re a limited company director, you are ultimately responsible for meeting your company’s annual filing and tax deadlines.

18. Not keeping up-to-date

Successive governments have taken a particular interest in the contracting sector.

IR35 remains the most important area for contractors to understand, but tax rules and compliance requirements change regularly.

Keeping up to date with developments can help you avoid costly mistakes.

Visit our ‘starting out’ section for more tips on being a successful contractor.