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So you’re thinking of becoming a contractor? Perhaps you are looking for the flexibility that comes with working in this way, or perhaps you are working in an industry where all the best jobs seem to go to contractors.

Whatever your reasons for choosing this kind of work, starting out as a contractor means that you need reliable information. We have answered some of the most commonly asked questions for you.

How do I become a contractor?

The first – and probably the scariest – step is to give notice at your current job. Then you can begin looking for contract work. It is possible to look for contract work while still in your job, but most agencies and clients want people who are available to actually start work as soon as possible. A minority of contracts are advertised several weeks in advance, but your options maybe limited if you are on four weeks’ notice.

Getting your first contract is the next step. You may already have contacts in your industry who can give you leads to follow up, but most contractors use agencies to find work, particularly when they are starting out.

Then you need to decide how you will operate as a contractor. There are three main options, Umbrella Company, Limited Company or Sole Trader which this guide will discuss more fully later.

Once you have made your decision, it is time to negotiate and sign your first contract. What you need to do at this point depends on your own circumstances and how you have decided to operate. You may need professional advice.

What are your options?

Contract work with an umbrella company

Contract work with an umbrella company

If you use an umbrella company, you become an employee of the umbrella company. That means you don’t have to worry about taxes, IR35 compliance or keeping detailed accounts. You will have the benefit of being in continuous employment, which can help with mortgages or loan applications and your pension will build up in one place. You will also have access to statutory benefits such as Statutory Sick Pay, Maternity and Paternity pay.

Contract work as a limited company

Contract work as a limited company

Operating through a limited company could be more attractive to agencies. The other big advantage is that, as the name suggests, your liability for any debts incurred by your business is limited. As a separate legal entity the limited company will be liable for its own debts, so as long as you, as a director, do not owe the company money and you do not breach your duties as a director you will not be liable personally for any debts.

Contract work as a sole trader

Contract work as a sole trader

Working as a sole trader is a fairly simple option. You need to register as self-employed with HMRC and keep a record of your business transactions and accounts. If you're working in the construction industry, you may wish to consider, PayStream’s My CIS service. You will have to pay income tax at the same rate as an employed person, plus Class 2 national insurance contributions and possibly Class 4 contributions too.

 

You must be genuinely self-employed to work in this way. Changes to the law in April 2014 means that if you are working via an agency and you incorrectly classify yourself as ‘self-employed,’ your agency may be liable for any underpaid tax and national insurance. If you are supervised, directed or controlled in your work, is it unlikely that you will be regarded by HMRC as genuinely self-employed and an umbrella company, such as My Max, may be more appropriate for you.

 

The main disadvantage of contracting as a sole trader comes when you are looking for work. Most contracting work is arranged through agencies, and most agencies will not deal with sole traders. They usually prefer to deal with umbrella companies or with contractors operating through their own limited companies.

 

The other big disadvantage of working as a sole trader is the liability issue: you are personally liable for acts or omissions and for any debts you may incur. You need to consider whether you are prepared to take this risk.

What are my obligations as a contractor?

As an employee of an umbrella company, you will need to complete a timesheet and fulfil your duties in accordance with your employment contract. Your employer, the umbrella company will have responsibilities to you too and uphold your employment rights.

If you are running your own limited company, you will be the director of the company and there are legal obligations connected with this. For example, you must file accurate and timely company accounts. If you are self-employed, you will have to keep business records and accounts and complete a self-assessment tax return.

 

What are the risks?

Every kind of work carries some kind of risk. When your current contract ends, there is no guarantee that there will be more work for you in your industry and your contract or assignment can be terminated at short notice. 

However, that does not mean that contracting is always the riskier option. Remember that you are not dependent on a single client to earn a living. You are free to choose where you work, who for and for how much, giving you a flexibility and freedom not enjoyed by other workers.

Although there is always a risk that you will fail to keep up with your paperwork and end up being fined for failing to do something important, like a tax return or even company accounts, you can reduce the risk of this happening by using an umbrella company like PayStream’s My Max or accountancy services from PayStream.

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