New to Contracting

Whether you're new to contracting, considering being self-employed or a time served contractor, finding the right umbrella company or accountant for you is vital. Within our resources we've complied a series of insightful posts that will help you compare umbrella companies, accountants and get the most out of your contracting lifestyle too

Introduction

Whether you value lifestyle, variety, time, money or simply freedom, for many contracting is the pinnacle of a glittering career that brings several benefits over full time employment. Contracting is the point at which you cease being a number and offer a niche skillset for a premium rate.

For most contractors, contracting is a way to express ones skills in an environment that you control. Gone are the days of sitting at the same desk day in day out. Your opinion is valued and often you’re working on projects that require short term but time served experience.

Yet with a premium rate and valued experience comes the natural downside of increased paperwork, chasing debt, securing new contracts and an uncertain future.

Of course, for those considering contracting the long term security offered by going from contract to contract can be daunting, but equally for those that have made a success out of their efforts, securing new contracts can be as easy as buying a mobile phone.

Considering Contracting

As a new contractor, fresh from the security of being employed, where offices and equipment are paid for, the world of contracting can seem strangely alien.

There’s no pension contributions, holiday pay or employee benefits to fall back on. Contractors by their very nature have to fend for themselves. Being self-sufficient mean finding a contract that will not only reward you well enough to justify those losses but also ensuring the gaps between contracts aren’t so large that they can have an effect on your income.

Of course, contracting isn’t all doom and gloom. For those contractors that succeed at building contacts and finding rewarding contracts, there is nothing more financially and socially rewarding than being your own boss.
The trick to successful contracting isn’t then to rush in at the first whiff of a contract, but to plan effectively for insecurity and ensure you have a network of resources at hand to maximise both your contracting fulfilment and your chances of securing a host of contracts.

There are multiple ways of doing this, but for those at the consideration stage when it comes to contracting there are three main ways to generate traction in terms of contracts.

1. Recruitment Agencies

Recruitment agencies are the backbone of the contracting market, especially for new contractors.

To an organisation in immediate need of a skilled contractor, recruitment agencies are the perfect first point of call.Recruitment agencies not only have a ready supply of available contractors but can filter the wheat from the chaff in advance to make the candidate selection process much easier.
To a contractor a recruitment agency is a marketing company that sells their services to the highest bidder, a wash with contract leads and ready to fight their corner.

Put both together and you get contractor supply and demand heaven.
But recruitment agencies come at a cost. While for permanent employees this cost is borne by the employer, in a contract world the cost of recruitment is met by the contractor themselves.

When a contract is agreed, the recruitment agency sits in the middle, with the contractor working for the agency and not the end client. This means that the contractor doesn’t know the true day rate the client is paying for their services, and the recruiter can sit in the middle charging a premium.
For example, while a project manager might charge the agency £300 per day for their services, the agency might in fact be charging the end client £400 per day and as such be generating a profit of 30% for fulfilling that contract. To many contractors that premium is excessive and something in the longer term that they want to eradicate.

As such, it’s common that only contractors considering contracting, or those with no contract opportunities of their own rush to the doors of a recruiter.

2. Linkedin & Social Marketing

With recruiters proving to be expensive, it’s best practice to start establishing your own presence in the contract market from day one.
Of course, while “who you know” will inevitably help, on day one you’re not going to know enough people to get you access to as many contract opportunities as a recruiter would. It’s therefore important that you start to cast your net wide in order to attract new opportunities.

By far the most popular route to self-marketing in recent years has been through Linkedin (a facebook for professionals) and through social media, with Twitter being by far the most popular outlet of the other available options.

Networks like Linkedin allow contractors to connect with other professionals, keep in touch with those they have worked with in the past and promote themselves to a wider audience through positive commenting on posts and group discussions.

By no means is Linkedin a quick route to ditching the expert recruiter, but with new features like job posting, it can be used successfully over time to produce a new stream of contract opportunities direct with end clients. In addition it’s a great social proof measure for recruiters when deciding who to offer a contract to.

In a world where there can be multiple candidates for a role, a large social presence that paints you as a subject matter expert can make all the difference.

3. Personal networks

Most contractors don’t jump straight into the world of contracting because they suddenly fancy working on new projects. In fact many have been slowly progressing towards contracting while still being employed, working on projects and with contractors on a day to day basis.

In fact the very reason they are considering contracting might be because they recognise the freedom and financial benefits a contractor they work with on a day to day basis is receiving for performing a relatively similar role.
Having the opportunity to work on projects or with seasoned contractors can itself present new opportunities. Perhaps a seasoned contractor with their own network worked with you on a project and thinks you’re well suited to the next project they are working on. Or maybe an old colleague has moved to a new employer and thinks you’re experience would be better suited there.

The contacts we make in working and contracting life are ultimately the best sources of new contracts. It’s therefore important that we stay connected and work these contacts for new opportunities.

For many contracting then is more the logical next step in a career path than a blind jump into the unknown. As time progresses and you get a number of contracts under your belt, it’s important to turn these external contact networks into your own.

Ultimately, no recruiter or Linkedin campaign is better than the personal networks (based on hard work, results and trust) that we create for ourselves.

Getting paid

With finding a new contract and fulfilling the one you currently have to worry about, the last thing any contractor needs is trouble getting paid, paying the right amount of tax or filing the necessary paperwork with HMRC. Yet with day rates all is not as simple as it seems.

At first glance a day rate of £300 vs an equivalent employed day rate of £200 looks attractive because a £100 a day rate hike represents a 50% pay increase. But the truth is that as an employee there’s a host of benefits in addition to you £200 that actually make being an employee more attractive than it looks on paper; not to mention some nasty tax shocks in store that will reduce the take home of anyone that’s self-employed.

For example, as an employee on £200 per day, you will be paid £52,200 for a full years employment (in 2019 that’s 261 working days) where as a contractor on £300 a day will on average bill £69,000 per year (as they will take around 30 days holiday). Immediately then, we can see that what appears to be a 50% increase in daily rate, is actually only 30%.

Additionally contractors have costs that they often can’t claim back form their end client or agency. These costs can be significant, for example travel expenses including overnight stays, computer equipment, insurance or the costs of administering your own business.

One of the most significant administration costs for contractors is Employers National Insurance payments. As an employee, these will have been paid over and above your salary at a rate of 13.8% by your employer. ENI is a considerable tax on employees that most people forget about entirely, yet as a contractor the liability for this tax falls on the contractor to pay out of their £300 per day.

In fact, taking into account the threshold for ENI, the average contractor billing £69,000 will actually pay £7,300 in ENI contributions.That £7,300 can’t be claimed back from the client or agency so it need to be deducted from the contractors billed amount. This means that after ENI, the contractor will only be able to pay themselves around £61,700 per annum. As a result, the initial 50% contractor premium is actually closer to 18%.

Yet an 18% pay rise shouldn’t be scoffed at. An 18% pay rise for anyone is substantial and for most people considering contracting it’s enough to make them jump head first into the world of self-employment.
For contractors looking to invoice for the first time and pay their taxes on time, two predominant options exist to help contractors with their invoicing and payroll.

a. Working through an Umbrella Company – an employer who invoices on your behalf and pays your taxes for you.

Umbrella Companies in the UK are specialist employers that exist to employ contractors. They have central payroll and invoicing departments that deal with your agency or end client, collect any money owed to you and process your payments through PAYE in turn paying your taxes to HMRC.
Aside from submitting a timesheet to your Umbrella or your agency, the most work you will need to do to get paid is to wait for the money to arrive in your bank and a payslip via email.

They are often the option of choice for first time contractors that are unsure about their contracting future and need a hassle free way to contract.
As your employer, you’ll sign a contract with your Umbrella and they will provide you with the basic insurances you require to work on a client’s site. In return the Umbrella Company will take a fee each week or month. Fees can range from £15-£30 per week depending upon the services offered.
Of course not all Umbrellas were created equal. It’s therefore important when choosing an Umbrella Company that the fee you pay isn’t the only thing you look at.

In fact some Umbrellasoffer better returns than others simply because the cheapest UK Umbrella Companies won’t take into consideration your eligibility for childcare contributions, the marriage allowance or other common employee benefits.

For example, an Umbrella Company that allows you to claim childcare vouchers, will on average leave someone earning £150 per day up to £57 per week better off.

In addition, some Umbrella Companies will offer you employee benefits like store discounts that if used well can save you hundreds of pounds per year and far outweigh the increased fee you’re paying to the Umbrella.
It might not seem like much but an Umbrella Company that offers employee benefits such as a 5% M&S discount, could leave you £20 a month better off. Combine this discount with childcare credits, and an Umbrella Company that costs you £10 more per week could actually leave a contractor on £150 per day £208 a month better off.

b. Working through a Limited Company – working in conjunction with an experienced accountant to operate your own company, raise invoices, file paperwork and organise your own tax payments.
Contractor Limited Companies, or Personal Service Companies, are vehicles through which a contractor can invoice for their time and process their payroll on their own.

Unlike with Umbrella Companies, the contractor is the only person working through their Limited Company and as such a single payroll needs to be run each time the contractor wishes to get paid.

Additionally the contractor, who is usually the single shareholderand director, is required to file company accounts and returns annually. Because this can often be complex, a contractor usually partners with an accountant who can take some of the administration burden off the shoulders of the contractor.

Utilising a Limited Company can in some circumstances enable a contractor to reduce their salary to a minimum and pay themselves through dividends (company profits) that don’t attract the same level of income or national insurance tax as they would if paid as a salary. Using this model helps these contractors to increase their net take home.

In general Limited Companies are considered to be more hassle than an Umbrella Company but can be more financially rewarding.

Historically anyone earning over £200 per day would have found a Limited Company to be more financially beneficial than an Umbrella Company, however in recent years the UK Government has clamped down on the “tax avoidance” practices of Contractor Limited Companies making them less attractive.

IR35

Only a few years ago the choice between an Umbrella Company and a Limited Company was relatively straight forward.

Anyone that wanted a low hassle way to contract without the tax headache chose an Umbrella Company while those on high day rates that wanted to maximise their net take home pay went with a Ltd Co.

However in April 2017 the UK Government changed the rules around contracting and “deemed employment” in the public sector, with the private sector following suit in April 2020. This rule change is more commonly known as IR35.

In effect, the rules were change to place the decision for IR35 compliance onto the UK end client. Previously this decision had been made by the contractor themselves, resulting in contracts often being written to ensure IR35 compliance regardless of the reality.

The April 2017 changes meant that regardless of the contract or actual working practices, the client could force the contractor to process their payroll as if they were deemed employed.

Deemed employment is where in the eyes of HMRC a self-employed contractor acts as if they’re actually employed and is really just self-employed to gain a tax advantage for both the contractor and the employer (who doesn’t have to pay ENI).

Basic indicators of whether a self-employed contractor will actually be deemed employed by HMRC for tax purposes include:

  • They need to book time off with their client
  • They need to work in their clients offices
  • They need to wear a uniform
  • They cannot send someone else to perform their role
  • They work fixed hours

If the contractor is actually found to be deemed employed or “inside IR35” then they must process their payroll as if they were employed. Failure to do so can result in large financial penalties.

While with an Umbrella Company this rule change represented very little change (because by their nature they are employed)for those contractors with a Limited Company it meant that they could no longer use the low salary and high dividend payroll model that significantly reduced their income and national insurance bills.

For contractors deemed to be inside of IR35, there’s no real advantage to the hassle that comes with a Limited Company and as such this payroll option is often unavailable to them.

The end

No matter your situation, finding the right umbrella company or accountant isn’t always easy.

For this reason, umbrellasupermarket.co.uk was launched to help thousands of contractors compare and choose the best umbrella company or accountant for them through our online comparison site.

But finding an umbrella or accountant isn’t the only thing those interested in contracting need to consider in order to be successful.

In order to help you start on that journey, we’ve compiled below an extensive list of contractor resources that will take you through the ABCs of contracting, the pitfalls and the successes.

Explore Our Resources

Modern high speed train on a clear day with motion blur

Contractor Travel Expenses

Unlike normal full-time employees, contractors working with an umbrella company are able to claim back a wide variety of expenses incurred as part of the delivery of their professional contracts. However, in the 2015 Budget, then Chancellor George Osborne announced the decision to severely restrict claims for tax relief on travel and related subsistence costs incurred by “employment intermediaries” including contractors.

Piggy bank in sunglassess on beach

Holiday Pay For Contractors

The two main reasons for leaving behind the world of full-time employment to become a contractor are the variety of work offered by clients and the significantly higher daily rates offered on short term contracts. But these benefits come at the expense of statutory benefits. Or does it?

Marketing your limited company

Marketing your limited company

There is a wide variety of ways in which a contractor limited company can market itself including a well-written CV, using a recruitment agency, online job boards, LinkedIn, networking, websites, and email marketing. Marketing gets a contractor in to see an interviewer who will eventually award the job. We look at the mindset of an interviewer, phone interviews, what’s expected at face-to-face interviews, and the increasing frequency of Skype interviews.

Ready to take the next step in setting up your structure?