Why Become a Contractor?
Trading in your office job for a contracting career is a huge decision, but it can be life changing. As a contractor, you can charge a much higher “day rate” than an employee might earn as a salary. Contractors can earn 20–50% more than an equivalent employee role. For instance, a contractor charging £500/day will be paid £120,000 over a 48-week contract, working five days a week (£500/day × 5 × 48 = £120,000), as opposed to a £80,000 salary.
Of course, contractors can also choose their own projects, work from any location, or take longer breaks between contracts.
It’s not all good news – contractors no longer get employer-provided holidays, sick pay, pensions, etc. As a self-employed contractor you have to budget for these things yourself, plus all your own taxes, accountancy, insurance, and regulatory requirements. One big consideration is the IR35 tax law, which effectively classifies some contractors as “employees” for tax purposes, resulting in you paying tax as if you was an employee but without the benefits!
If you’re thinking of becoming a contractor, here are some crucial questions to consider before you jump.
Questions to ask yourself before becoming a contractor
1. Will I make as much money as I expect?
Contractors can charge higher rates, but they also have more responsibility, expense and financial risk. Gaps between contracts (“downtime”) can occur, especially when starting out. Most contractors take 4–8 weeks of downtime per year – plan your budget with this in mind.
The IR35 tax law might also mean that you pay more tax, just like an employee (we explain IR35 in more detail below). This means you’ll take home less net pay than you expected and even potentially be stung for employers NI – something many new contractors don’t appreciate. Do the research – is your contract “inside IR35” or “outside IR35”?
2. Do I know my rates and my market?
Contractor rates vary significantly by industry. For instance, rates for IT contractors often fall between £400 and £800/day. But this will vary considerably based on industry, your experience, niche skills, etc. Online job boards like CWJobs and LinkedIn allow you to filter job adverts by salary band, which can help you estimate market rates for your role.
3. How will I manage without those employee benefits?
This one may surprise you, but don’t forget to include private health insurance and pension contributions in your budget. Private health insurance can cost between £50 and £100 per month, while you might contribute £60,000 per year towards a pension via your Ltd company, with full tax relief!
4. Do I have enough money saved?
Aim to set aside 30–40% of your expected income towards all your taxes (corporation tax, VAT, your own personal tax), and consider setting up an emergency fund worth at least 3–6 months of your usual expenses.
Software such as FreeAgent allow you to keep a more precise track on the taxes due at any given time and is something highly recommended for budgeting purposes.
Steps to becoming a contractor
- Research your market and expected rates
- Choose your business type (most contractors will use a limited company)
- Find your first contract(s)
- Get advice and set up your accounts
1. Research your market and expected rates
From finding a job to determining your “day rate”, there’s a lot of groundwork to be doing up front. Register and search for contractor jobs on CWJobs or LinkedIn to see what your market rates might look like for the type of work you’re interested in and more so what aligns with your skills and experience.
2. Choose your business type
We recommend a limited company (“Ltd”) for contractors outside IR35, earning above £200 per day and with longevity in mind. Those Inside IR35, using the contract as a stop gap between permanent positions or below £200 will find themselves better using a compliant Umbrella company.
3. Find your first contract(s)
You can register with agencies like Hays, Reed, or Michael Page, but many contractors like to source their own clients to maximise their take-home pay. Build up your contacts on LinkedIn, or try your local chambers of commerce.
4. Get advice and set up your accounts
Set yourself up for success with an accountant who gets contractors. At Bright Ideas Accountancy, our cost-effective contractors’ packages include FreeAgent accounting software (ideal for contractors) so you can manage your books all year round and see your finances in real time, plus same-day responses to calls/emails before 3pm Monday-Friday. Many contractors don’t realise their tax liability until the end of the financial year (“tax bill shock”!) or sign a contract without checking the IR35 status.
Don’t fall into these traps – let’s work together so you’re IR35-compliant and tax-efficient from day one.
Don’t let your contractor career get sunk
Most new contractors get it right, but a few mistakes can cost you thousands. Have you heard about the contractor who had a great offer from a client, signed the contract…and then realised they were “inside IR35” and paying more tax than an employee? Or the one who had “bill shock” when they got their year-end tax bill and realised they’d taken too much home throughout the year? Don’t be them.
Contractors are responsible for their own IR35 (in some cases) and tax planning, but you don’t have to do it alone. An accountant who understands contractors can help keep you on track and make your life much easier.
The first step is your free, no-obligation consultation with Bright Ideas Accountancy. We’ll answer any questions you have about getting started, including setting up your business and dealing with IR35.
Get in touch today
