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 – written by the ITContracting team. We last updated this guide in January 2024.

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.

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.

Make sure the client, 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 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 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 brutal approach against individuals who use tax avoidance schemes – courtesy of the 2019 Loan Charge. If you are tempted, you could end up with massive 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 hit the private sector in April 2021 have made life even more challenging for contractors.

As a minimum, submit your contracts for a professional review of the working and your 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 put aside any future liabilities to pay Corporation Tax and VAT. Consider investing these funds in a savings account where you can earn interest before you need to pay HMRC.

If you use accounting software – such as FreeAgent – you can always see a snapshot of your company’s finances. This includes how much money should be set aside for tax, and how much money can be distributed from profits.

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 who may be 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 foot the bill for the costs associated with 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. You also need to pay an accountant.

Fortunately, you should now be earning extra funds to cover these costs.

Interestingly, it is cheaper for many clients to hire contractors than take on permanent staff – even when daily rates are high.

This makes sense when you add up the benefits employers provide to their staff, together with Employers’ National Insurance and pension costs.

11. Running out of cash

The number one reason why 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 – even if you’re only creating a single monthly invoice.

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

Use an online accounting system – like FreeAgent or Xero.

These tools let you invoice clients, and show you in real-time what your cash-flow situation is, when invoices are due, and if any need to be chased up.

Before you start a new contract, ask your agent, or client, who you should invoice. Find out the name of a real person (not just ‘the accounts department’), their phone number and email address!

12. Being precious about job offers

As a contractor, you can’t always afford to be too picky about the roles you apply for.

You’re unlikely to find a ‘perfect’ role, in terms of skillset, industry, rate and location, so should be willing to compromise.

In leaner times too, be aware of the opportunity cost of waiting for that ‘ideal role’, while passing up the opportunity to take on less desirable contracts which start right away.

13. Claiming illegitimate expenses

The rules which govern the expenses you can claim are complex, so you should tread carefully and ask your accountant first 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 for anything which benefits you as an individual, e.g. gym membership. If you do, the expense becomes a ‘benefit in kind’, and you and your company will be taxed on its value.

You also can’t claim for business use of a proportion of your residential broadband bill, as you would have incurred the costs regardless. Find out more in our concise 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.

Sure, you are being hired for the specific skills and experience you can bring to a project, but you should still find out as much as you can about your prospective client in advance.

Any extra knowledge you can demonstrate could give you the edge over a similar candidate with the same skillset.

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. You would be if you were getting a kickback!

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 – both in terms of price, and service.

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 by the client.

Dedicate an hour or so each month to make sure your online accounts are updated.

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, and not your accountant.

So, don’t bury your head in the sand. Make sure you know when your Confirmation Statement, and company accounts filing deadlines are.

Make sure you file your quarterly VAT returns on time and don’t miss the 31st January filing deadline for your personal tax return.

If you file late, or miss a payment deadline, the financial penalties can be severe. You will be charged a penalty for late filing, as well as penalties and interest for late payment of any tax.

18. Not keeping up-to-date

For some reason, successive governments have taken a particular interest in the contracting sector.

It’s hard to think of another industry upon which so much half-baked legislation has been heaped.

Of course, IR35 is the most obvious tax measure all contractors should be aware, but there are plenty more. The most recent is the April 2023 Corporation Tax hike.

There are many online resources for contractors which highlight potential threats to contractors (and occasional good news).

So, make sure you minimise the chances of committing one of these contracting mistakes by keeping an eye on the news.

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