What is a Contractor?

Making the move from permanent to contracting is an exciting career move and there are plenty of opportunities available. If you’re considering becoming self-employed, there’s a lot of decisions to make before you’re up and running.

We created our guide to help you better understand your options and to get you up and running as soon as possible. Here are a few of the first things you will need to think about.

What is contracting?

Contractors are essentially self employed individuals who work for clients for set periods of time or until a specific piece of work is completed. Usually contractors are paid on either an hourly basis, or a fixed fee for the contract, and the rates for this kind of work are generally considerably higher than they would be for an equivalent position as a permanent employee. Our take home pay calculator can help you to get an idea of the kind of earnings you could enjoy as a contractor and you can compare it to other ways of working to help you make a financially sound decision.

As a contractor, you can enjoy the best of both worlds: your skills and experience will be valued by your client and colleagues, but you will have the freedom to choose your own career path, choose when and where you work and pick assignments that appeal to your preferences of what you want to do.

Why should I become a contractor?

If you’re considering going self-employed, here are some of the perks which could convince you:

Financial Benefits

• Contractors usually command rates of at least twice what a full time worker would earn, as compensation for the lack of security, sick pay and holidays.
• Overtime is often available to those who want to earn more and make the most of their contract.
• If you operate as a limited company then you will be able to take advantage of tax planning opportunities to increase your take home pay.
• As a limited company contractor, you are able to claim a wider range of expenses against your income, which can lower your tax bill considerably.
• Working through a limited company is the most tax efficient way of organising your business, which could mean you take home as much as 80 percent of the value of your contract.

Freedom and flexibility

• Contractors are able to choose when and where they work and take on the contracts that appeal to them.
• Short-term contracts allow you to negotiate your terms whenever you switch contracts to ensure that you are always making the most of every opportunity.
• You aren’t reliant on an annual leave entitlement to have time off, and you can choose to have longer holidays and breaks whenever you want them.
• Switching contracts is much simpler than getting a new job.
• You can pick projects which will allow you to expand your skills and develop your career in the direction that suits you.
• Contracting allows you to control your own career, increase the breadth of your experience and plan your work to suit your other commitments.

What are my options as a contractor?

One of the first things to consider is whether you will work through an intermediary such as an umbrella company, or if you will choose to form your own limited company to work through. A specialist accountant will help you to make the decision, advising you of the advantages and disadvantages of operating as a limited company and providing you with the benefit of their experience to make the best decisions to suit your specific situation.

There are many different ways to operate your business, but most contractors will choose to operate through either of the two options:

Umbrella company

When you work under an umbrella company, you will be treated as an employee of that company. Your end client will pay your employer who will in turn pay these funds to your account.

What’s involved if I work under an umbrella company?

If you work through an intermediary such as an umbrella company, then you will operate under their control. This means that they will be paying PAYE tax and National Insurance Contributions on your behalf, so you will have these deducted at source as your wages are processed. Your administrative burden will be significantly reduced, but your take home pay will as well, meaning that you will only take home around 60-65 percent of your contract value.

Is an umbrella company right for me?

If you’re only considering self-employment for a short period of time and you don’t want the hassle of managing your own finances, a PAYE umbrella could be a perfect alternative. As an umbrella employee, you will get a taste of the freedoms of self-employment but still enjoy the security of a permanent employee. Nixon Williams does not offer

Limited company

A limited company is a separate entity which is formed for the sole purpose of running your business. You will need to appoint a director of your company who will submit tax returns and file annual reports.

What is involved if I form my own limited company?

You will be responsible for managing every aspect of your business, from marketing and selling your services to invoicing, expenses and completing your tax return. Using an accountant is a great way to reduce your workload, especially if you use specialist contractor accountant.

Is a limited company right for me?

If you anticipate to take home more than £25,000 per year from work and you’re looking at contracting full time, a limited company could be the perfect solution. There is plenty of support available for new contractors in the way of resources and specialist accountants.

How much could I take home?

One of the most important considerations when a contractor is deciding home to operate is take home pay. If you work under an umbrella, you will typically take home around 60-65% of your overall earnings. Working under a limited company gives you greater flexibility with your money and you can expect to take home around 75-80% of your contract rate.

To find out more, try our take home pay calculator.

How do I set up my own business?

Your limited company will become the foundation for which you build your career, so it’s crucial that you get it right.

If you choose to go limited, you will need to establish your company with HMRC, open a business bank account and appoint a director.

You can find more about starting your limited company in our guide or if you would like a call from one of our best advice team, you can fill in the call back form below: