Thinking of becoming a contractor?

Here are Five Steps to get you Started

Life as a contractor can be incredibly rewarding. Financially, you can earn more than you would as a PAYE employee and get paid in a more tax efficient way. As a permanent employee, you are taxed at source and have to pay income tax and National Insurance contributions on your earnings. By becoming a contractor and setting up a limited company, you can expect to take home 70-80 percent of your pay.

In terms of your career, becoming a contractor gives you the freedom to choose the sectors you want work in and focus on the skills you want to develop. So, if you’ve made the decision to leap into life as a contractor and leave the permanent workforce behind, here are the steps you need to take to get you started…

Step 1: Leaving your permanent job

The number of people being recruited into permanent roles is currently falling at its sharpest rate since 2009. Brexit uncertainty means firms are choosing to take on short-term workers rather than committing to long-term recruitment decisions. This means now could be a great to jump into life as a contractor without looking back

Recruiting contractors is a much faster process than permanent workers, and often firms will want you to attend an interview immediately and start ASAP. Once you have handed in your notice at work, you should start applying for contractor roles no more than a week or two before you become available. If your employment contract obliges you to serve a long notice period, it might be worth trying to negotiate this down to become a contractor more quickly.

Step 2: Finding your first contract

The next step is to start looking around for your first contract. Contractors secure their contracts in one of two ways: they either approach the client directly, often using personal contacts; or use the services of specialist recruitment agencies. Most contractors actually prefer to go through a recruitment agency, and in fact, in some sectors, this is the only way you can find a role.

As well as online job boards that focus on a range of sectors, there are also some sector-specific sites that’ll be well worth interacting with. Upload your details and CVs onto these sites so recruiters can get in touch with the details of suitable contracts.

Step 3: Understanding your IR35 status

IR35 is a big deal in the contracting world and something you’re going to need to get to grips with. IR35 is legislation which determines how a worker should pay tax, whether it’s as a self-employed individual or as an employee. Having a contract that falls within IR35 legislation means you will be taxed as an employee and could lose up to 25 percent of your net income.

For this reason, it is essential you clarify your status before you begin a contract. Seeking advice from a qualified tax expert is advisable as the cost of a mistake can be high. Some specialist contractor accountants understand the basics of IR35 and will be able to review a contract on your behalf.

Step 4: Limited company or umbrella company?

Once you have decided to take the leap into contractor life, the next big decision is whether to set up a limited company or operate under an umbrella company.

A contractor who wants to maximise their earnings would be better served by setting up a limited company,as this will give them complete control over their business and bank account. However, there are some additional administrative and accounting duties to complete.

Operating under an umbrella company will remove the additional administrative and accounting duties, but with tax and National Insurance contributions deducted at source, it will reduce your take home pay.

Step 5: Fulfilling your new obligations

If you’ve decided to operate under an umbrella company then your income will processed and taxed in the same way as a PAYE employee. You will need to ensure you submit a timesheet to the umbrella company, which will then invoice the client. You will also have to pay the umbrella company a fee.

If you choose to set up a limited company you will have a number of new obligations. This includes registering for self-assessment and submitting a tax return every year. You will also need to pay corporation tax on the profits your company makes, as well as taxes on the salary and dividends you draw down, depending on how much you take.

Profectus Recruitment operates as a recruitment agency in the IT & Digital space in the UK and assists clients in both permanent and contract recruitment.

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