How to start as a contractor
The decision of becoming a contractor might be challenging and a difficult decision to make, especially if you are leaving a steady paying full time job to start as a contractor. Having the confidence to quit your job, or if you are in a situation of being made reduntant and are forced into contracting this guide will help you make the correct decision by looking at some of the important aspects of starting up as a contractor.
Some important points for Contractors
What is a Contractor?
A contractor is “a person or company that undertakes a contract to provide materials, equipment or labour to perform a service or do a job within a specified time and for a mutually agreed price.”.
Contractors are professionals who can operate as a Sole Trader or via a limited company.
Contractor or Freelancer?
The main difference is that a contractor has a “contract” for the job they undertake and are bound to the contract until the job is complete. A freelancer is a professional who provides their services to a various number of clients, with no permanent contract or client – freelancers are more flexible than contractors.
A contractors jobs are usually longer and more secure than with that of a freelancer.
Advantages & Disadvatages of Contracting
There are various reasons people usually choose to work as contractors rather than employees, below are both the advantages and disadvantages of starting as a contractor.
What are the advantages of contracting?
Some advantages of contracting:
- Higher Pay, earning more money
- Paying lower taxes (our specialist contractor accountants can show you how to achieve this)
- Better Professional work satisfaction
- Greater variety of work, work on projects that interest you
- More choice over when and where to work
- Not being tied down to working with people you don’t like
- Being your own boss
What are the disadvantages of contracting?
Some disadvantages to contracting:
- Added responsibilities by having to manage your own business
- Reduced job security, most contracting are usually temporary
- Can mean having to move house or travel a lot for work
- Staying in contract, the need to secure ongoing contracts to earn enough
- More stress on having to work on deadlines
- No employee holiday benefits, you cannot take time off during your contract
- IR35, getting caught by the IR35 Legislation
Contractor Business Model
Starting as a contractor you are offered a choice of what type of business you will work work as. The imprtance of this choice is that it can affect how much tax you pay – Our specialist contractor accountants can advise you on the best option. Below all the options are explained.
Limited Company
A limited company allows contractors to be separate legal entities from their company, meaning they have a “limited” liability and are not personally liable for any financial difficulties faced by the company. If your company is bankrupt, your personal bank accounts, car, house etc. annot be claimed, as you have a “limited” liability.
As a sole trader you get taxed on your income, you may end up paying 30% tax on gross income. Via a limited company you pay Corporation Tax and can get paid with a mix of a low wage and dividends, which means you will pay less tax and less NICs.
Through a limted company you an also claim business expenses which can include equipment, mileage allowance, business trips, stationary etc. Business expenses are deducted from the company’s profit which is not taxed, so you will end up paying less tax at the end of each tax year.
View or guide on Starting a Limited Company
Sole Trader
This is the simplest option for contractors since any profits are automatically yours since there is no separation between you and the business. You will need to file a Self-Assessment Tax Return each year and make National Insurance Contributions. (An accountant can help you with Self-Assessments). However, clients are less likely to work with contractors who are sole traders. Read more about trading as a Sole Trader
Partnership
This is similar to a sole trader, but with two or more people work together as single company.
Umbrella Company
Contractors can choose to be employees of an umbrella company, which deals with things like sending invoices and chasing payments. It makes things a lot simpler for contractors at the expense of having to pay higher taxes due to being an employee.
IR35 Legislation for contractors
IR35 regulations are in place to stop contractors being able to pay lower taxes when they are working in a way which makes them essentially employees of the company that hires them. Much of it comes down to how your contract is worded and whether an employee would usually be doing exactly the same job. A specialist contractor accountant can help ensure you are not caught out by IR35 regulations.
What happens if a contractor is caught out by IR35?
If, as a contractor, you are caught working outside the IR35 rules, you will be considered as an employee of the client company that pays you so you will need to take all the money as a salary rather than being allowed to receive it as dividends. This is why contractors need to pay more tax if they work outside of IR35 rules.
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