How to become a contractor

How to become a contractor

Being your own boss has its benefits. From choosing which hours you work to achieving greater financial independence, there are many reasons why employees leave permanent roles behind and instead offer their services on a contractual basis. This can be a difficult decision, as it may come down to sacrificing job security for greater potential freedom — but with time and experience in your trade, you’ll be able to decide which path is right for you.

However, establishing yourself as a contractor can be challenging. There are lots of moving parts involved, from choosing a business structure to marketing yourself, and so much more.

If you think you’ve got the work ethic and know-how to succeed though, here’s a handy guide to becoming a contractor to help you on your way.

Decide how you’ll operate

There are two popular routes taken to start a career as a contractor in the UK. As you won’t be working as a traditional employee for your client, you won’t be on their payroll — and so you should decide whether you’ll start a limited company or join an umbrella company to go about getting paid.

Start a limited company

Many contractors choose to set up their own limited company for full autonomy over their work. This involves registering with Companies House and HMRC, and completing the necessary accounting to operate as an independent legal entity.

This way, contractors can maximise their take-home pay, as operations under a limited company receive incentive tax rates. It can also be a safer option financially, as any claims that emerge are taken on the assets of the company rather than your personal assets.

However, there is a significant amount of administrative work that goes into managing a limited company. Accounts must be annually submitted, all income and expenses tracked, and corporation tax paid, as well as guarantors and shareholders put forward for certification. Without adequate organisation and accounting, this can be tricky legal territory to navigate. Take a look at the government guidelines for a comprehensive guide to setting up a limited company.

Join an umbrella company

As the alternative to setting up a limited company, many contractors opt to join an umbrella company instead. This is a simpler way to operate, as the company can serve as your proxy employer and manage the relevant administrative work — but they will also take a cut of your pay for their services.

When working under an umbrella company, you serve as an employee eligible for regular PAYE tax and national insurance contributions, so will not receive the tax benefits associated with being independent. However, you are also entitled to employee benefits like sick pay and a pension scheme, so some contractors prefer this way of work.

Get insured

If you do opt to set up a limited company, there are various precautions recommended to protect your finances. When working independently, you may be liable for any issues or accidents that occur on the job, so having the proper insurance to protect your livelihood is essential. Additionally, clients will often stipulate in contract that you need to have a particular level of cover, so you’d need insurance to even get hired.

There are several types of cover that are recommended for contractors, to mitigate against all types of risk faced at work. As a result, a policy that integrates public liability insurance, product liability insurance, and employer’s liability insurance is the most suitable choice.

Let’s explain these types of cover:

  • Public liability insurance “covers injury to third parties or damage to their property”, and is the backbone of any contractor’s insurance policy, according to insurers at Tradesman Saver. This is because it protects your business from the costs involved with compensation claims brought against you after an accident on the job, with such incidents an inherent risk of working in a public-facing role.
  • Product liability insurance covers any costs sustained from claims in relation to a fault with a product that you have supplied.
  • Employer’s liability insurance covers any costs sustained from claims made by employees with a work-related injury or illness.  

Learn your tax liabilities

If you’ve started to research the income rules for contractors, you may be getting to know your new tax position and reading about IR35 legislation. These are a set of rules that govern operations between a contractor and client, to ensure that individuals don’t declare themselves as independent contractors when they better fit the description of a permanent employee. This prevents tax avoidance, as individuals with the same benefits and designations as full-time employees of a company should not additionally receive the tax benefits that come with being a contractor.

It’s important to get accustomed to these rules in detail, as those found to be in breach of IR35 may incur severe tax bills, as well as other penalties. Thankfully, there is a government tool to help contractors determine whether they’re operating in or out of IR35.

Market yourself

Now that you’re up to speed on all the relevant paperwork, you can plan out how you’ll attract your first clients. Without decades in the industry and a contact book to show for it, many find it challenging to initially put themselves on the map.

Online marketing methods

To begin, a robust online presence is the vital first step. LinkedIn is a great tool to access the online job market, with its large pool of over 15 million existing listings — but can also serve as your own front of shop, advertising your experience to potential clients. To create a profile, you should provide all of the information that somebody might want to know about you before hiring — such as technical skills, previous experience, and qualifications.

You may also want to set up a website to provide a one-stop destination for potential clients. This will let you post contact details, an overview of the jobs you do, a gallery, and a price list for common quotes all in one place. This way, you can promote your work and streamline the process for those shopping for a contractor.

Offline marketing methods

Lastly, offline marketing efforts like leaflets and business cards can help to promote your business. These physical materials are conversation starters, and though we live in the digital age, word of mouth is still a vital part of trade marketing — especially if you’re wanting to keep your work local.

Start working as a contractor

Once the admin is complete and your name is out there, you can secure that all-important first job working as a contractor. From here, many take advantage of client contacts and networking opportunities in the real world, as well as recruitment agencies that can provide an additional avenue for finding contracts.

A solid client base and a good reputation can pay dividends as you build your business — and you can quickly recoup the time and money invested into setting up your new career. With hard work and commitment, one job turns into another and you’ll soon be reaping the benefits of being your own boss.

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