How to Become a Contractor

We'll walk through the steps you need to consider when becoming a contractor. From company structure to setting up your profile on different platforms, here's your ultimate guide on becoming a contractor.

June 19, 2020

Intro: Why people start contracting

So, you’re thinking of becoming a contractor. There’s probably one of three reasons driving this:

You’ve received a Job Offer 

You’ve just received a job offer and now need to decide on whether to set up a limited company, umbrella company or become a sole trader (or you may not have the choice in deciding).

You’re in the right place. 

This guide will walk you through the best company structure for you, accounting support, VAT, business services you need to consider and finding new opportunities.

You want to increase your pay

You’d like to increase your pay by switching from permanent roles to interim/ contractor roles.

Contracting can be very lucrative.

You’ll need to be comfortable with a certain level of risk (short notice periods), increased monthly admin (as a Limited Company) and less benefits than being an employee (paid leave, sick days). 

However, you’ll earn more, get greater flexibility and hopefully grow a consulting business. Keep reading.

Project Flexibility

Getting multiple requests for your services? Amazing.

Setting yourself up as a contractor through a Limited Company means you can start expanding your client base rapidly and work on different projects a few days a week.

You can still set this up as a current PAYE employee of a company and this can be a great stepping stone to launching your own business.

Let's talk about the right company structure for you.

Decide on Company Structure

Depending on how much research you’ve done then you may have started hearing terms like IR35, Umbrella Company, Limited Company, Sole Trader and more. It’s a minefield!

When I first started contracting I found it confusing trying to figure out which route to take. 

My personal belief is that people make it overly complex. Perhaps intentionally. You’re more likely to overpay for a service if you don’t understand the nuances (I did).

So, I’ll keep it simple.

Sole Trader or Self Employed

Best For: Small projects outside of a regular PAYE role.

If you work as a freelancer on the side from a Permanent PAYE role and make under £25k a year doing this, then you can operate as a “Sole Trader”.

As an example, if you wanted to start earning some additional income from your regular PAYE role and started doing small projects on UpWork (or similar platforms) then you could just take payment into your personal account.

You don’t need to set up a company to do this but you’ll need to keep track of your income and file a Self Assessment tax return at the end of each tax year.

Advantages of an Sole Trader structure:

  • Simple set up
  • Can claim a limited number of tax deductible expenses

Disadvantages of Sole Trader structure:

  • Need to keep track of income to report to HMRC
  • Annual Self Assessment Tax Return filings each year
  • Not accepted for any moderately sized company or contractor project roles

Umbrella Company

Best for: contractors who want to keep things really simple and earn a regular PAYE income.

An Umbrella company will sort out your pay, income tax deductions and National Insurance. 

Essentially, they act as an intermediary between you and your client. You typically fill in a timesheet with the amount of hours worked during the last week/ month (depending on payment period). They then invoice your client and sort out all your tax and pay you as a PAYE employee.

You won’t have to worry about admin but you’ll have to worry about their fees and you won’t be maximizing your earnings.

Advantages of an Umbrella Company:

  • All paperwork and filing requirements are taken care of.
  • May include personal indemnity insurance.

Disadvantages of Umbrella Company:

  • National Insurance and PAYE are deducted before you get paid.
  • Admin fees can vary from a percentage to a fixed cost.
  • There are some really poor quality Umbrella firms

Limited Company

Best For: projects outside of IR35 (we’ll get to that in a second), invoicing multiple clients easily and tax efficiency.

Advantages of a Limited Company:

  • Professional image and ability to take on multiple clients
  • Tax efficiency due to tax deductible expenses & payment through dividends
  • Limited liability if something happens to the company

Disadvantages of Limited Company:

  • Filing and reporting requirements - especially with VAT registration
  • Reduced privacy - other people can find details about you and your company on Companies House.

IR35

IR35 was supposed to come into effect in April 2020. Due to Covid-19 this has now been pushed back to April 2021.

IR35 is a piece of legislation that requires companies to crack down on contractors who are “disguised employees”. Meaning, their role is identical to a regular employee. 

There have been instances where contractors worked in the same role for 2 or more years which made HMRC question - why aren’t they employees?

Inside IR35 = you are paid the same as a regular employee.

Outside IR35 = you pay yourself how you like.

Working as a contractor through a Limited Company can be considered tax efficient because you can structure your company in a way where you reduce your:

  • National Insurance contributions by paying a salary below a certain threshold
  • Income Tax by paying yourself through Dividends rather than salary (these are taxed differently)

Working outside IR35

There’s a few conditions you need to be able to say apply to you:

  • Exclusivity: you have more than one client
  • Role flexibility: you can choose or have flexibility on where you work or when you work.
  • Substitution: there is a clause in your contract that allows you to identify someone else who can do your tasks if needed.
  • Equipment: you use your own equipment for the job (sometimes this isn’t feasible though with certain security risks).
  • Termination window: you have a short or immediate termination window
  • Benefits: you don’t receive paid leave or sick pay from your client. You should also have your own insurance.

There are a lot of nuances in IR35 and we’ve put together an insanely comprehensive IR35 guide.

Does an Umbrella overcome IR35?

Simply put, no. There’s no real point in operating under an Umbrella Company, who will charge an administration fee, when you’re getting paid as a regular PAYE employee.

You’ll save more by just being a regular PAYE employee at your current company.

How to Register a Limited Company

Do you feel ready to start your Limited Company? Here’s 3 ways to do it:

  • Companies House: For £12 you can register your company on Companies House here.
  • Formation Agent: From £12 to £99 you can find a formation agent to do it for you with a few added services – see registered agents here.
  • Forma: we provide free registration with all our Accountancy and Virtual Office packages here.

Determine Level of Accounting Support

VAT - Do you need it?

The current VAT threshold is £85,000 and the VAT rate is 20%.

It’s easy to register but does require quarterly filing, so don’t register until you’re ready. Deregistration can get a little tricky so it’s easier to wait until you’ve confirmed this.

You'll need to register for VAT within 30 days of meeting any of these conditions:

  • Your taxable turnover exceeds £85,000 within a 12-month period.
  • You expect your taxable turnover to exceed £85,000 in the next 30-day period.
  • Your business had a taxable turnover exceeding £85,000 over the last 12 months.

Once you’re VAT registered then you’ll need to add this charge into your services and keep track of the amount owed.

Advantages of registering for VAT:

  • Enhances business perceptions: Registering for VAT tends to lend credibility to your business, and makes your company appear larger and more established.
  • You can reclaim VAT: You can reclaim VAT on goods and services you've purchased from other businesses

Advantages of registering for VAT: 

  • Administration Burden: You’ll need to file quarterly VAT returns, keep good VAT records and pay VAT on time otherwise you’ll get penalties.
  • Services become more “expensive”: For non-VAT registered businesses your services can become more expensive.

Accountants:

Things to look out for:

  • Bespoke software: we’ll get onto this in the next section but be very careful with bespoke accounting software created by the accounting firm. Ensure it has all the features you need, good help documentation and a user friendly interface. Don’t compromise on this or it could cost you time and a lot of money if you get fined!
  • TrustPilot Reviews: there are some shocking stories of missed deadlines, hidden costs and terrible customer service from companies.
  • Hidden costs & minimum terms: some accountants will lock you into a 6 month minimum term and others may charge you for cancellation.
  • Level of support: it's good to ask questions like do they have a team inbox? Do you know who your accountant is? How can you contact them?

We take care of absolutely everything you need in simple monthly packages. Get all you filing requirements, accounting software, dedicated accountant, partner discounts, tax advice and company registration with our packages. We provide support through bookable calls, online chat and even over text (SMS) which no one else does.

With prices starting at £59/mo you can see our contractor accounting prices here.

Accounting Software:

As highlighted in the previous section, beware of bespoke accounting software created by an accounting firm.

The largest small business accounting firms in the UK come nowhere close to the features, scale and support that is available with premium accounting software and they are more focused on acting as accountants rather than software developers. There's been an incredible amount of innovation and change in accounting software in the last few years and you can see how these companies are struggling to keep up to date with features.

Personally, I used software that was created by an accounting firm and half my time was spent calling them up after there were bugs with the software, I received incorrect notifications or their support documentation was useless.

After a significant amount of testing we have one recommended software for contractors:

FreeAgent:

Pricing: £14.50 for 6 months then £29 a month.

Unlike Xero and Quickbooks, FreeAgent just has one package for Limited Company accounting. 

This is hands down the best in terms of a simple user experience, packed with features, unlimited invoices, great mobile app and clear deadlines and metrics around what you have coming up (VAT, Corporation Tax) and how much you need to pay.

We include this within our package pricing (starting at £59/mo) or if you have a NatWest, RBS or Mettle business bank account, you can get this for free and we'll give you a £10 discount on your package.

Additional Business Requirements

Business Bank Account:

A business bank account is a mandatory requirement if you have a Limited Company. Given that your business is a legal separate entity from yourself, you have to report your income and transactions through this account.

We wrote an extensive article comparing the best business bank accounts. We tested the sign up process for newer challenger banks like Starling, Tide, Revolut, Mettle and Metro.

Spoiler: Metro has a terrible (and manual) onboarding process that requires you to go into a branch. A lot of accountants tend to recommend it though. Why? They get a generous kickback for each client they refer.

Insurance:

Depending on your client contracts and the type of work you’re doing, your insurance requirements can vary significantly.

Some contracts may include stipulations for a certain minimum threshold of professional indemnity cover (typically £1 million) whereas others may not require this.

We have a great partnership with Superscript where you can get 10% off your business insurance.

Again, we've compared pricing, service quality, onboarding processes and features (monthly agreement and range of cover you can add and remove) and think Superscript have the best options on the market.

Finding Opportunities

Update your LinkedIn

Once you get into contracting, it’s important to start brushing up your LinkedIn profile.

Getting endorsements, writing posts, commenting on posts and expanding your connections is a great way to get your services and profile out there.

You need to think about how to continously build out your pipeline of projects.

We take it so seriously, we ran our own experiments on how to create a top 1% profile on LinkedIn here.

Sign Up to Consulting Platforms

We put together an ultimate article on 19 places to find contractor roles and jobs (at the time of writing we expect this to expand more).

We are currently building out opportunities on our platforrm (we're the only contractor specialist to do this in the UK) where you can find specific contractor roles from a variety of different platforms and recruiters.

To oversimplify our hard work, here are some platforms to sign up to when you’re looking for new roles:

Network with Interim Recruiters

Typically I’ve found contractor roles by developing good relationships with a range of recruiters.

Recruiters like to be taken out for coffee too, so do your own business development and start establishing strong connections and building a reputation with recruiters.

Again, we pulled a lot of this together in our where to find contractor jobs article but here are a few recruitment firms we recommend:

Find a Community

There are some great community newsletters and groups for contractors.

We're currently building a community platform but there are some great ones out there too!

From more specialist contractor websites like IT Contracting to more general sites like Contractor UK, Contractor Weekly or Contractor Eye - you’d be surprised by the level of support available.

Of all of the contractor sites, Contractor UK definitely has the most active forum.

MeetUp groups can also be a good way to tap into the contracting community although this has been limited during C-19.

There are also a range of LinkedIn groups you can join which can help connect you with the community. 

A contractor switching to Forma accounting

Ready to upgrade your accounting?

We bundle everything you need to operate as a contract consultant. Get premium accounting support, FreeAgent software, partner discounts and explore thousands of contract opportunities.

Get a Free Guide for your business:

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All the accounting advice you need to know when starting a business

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