Should I become a contractor?

What is a Contractor?

A contractor is a worker brought in as an external hire by a company to complete a specific service or task. This can be an individual self-employed person, or a worker for an agency that employs a team of specialists.

If you wish to become an independent contractor yourself, it’s likely that you’ll be establishing yourself as a self-employed specialist, available for hire to tackle one-off projects in your area of expertise. This career path presents a different set of circumstances to employment, so you’ll need to be aware of a few things.

There are no limits to the type of contractor you could be. If you have the type of skills or expertise that people are willing to pay for then you can command a good living as a contractor – whether that be in IT, consulting, creative media or any sector of your choosing.

What is the Difference Between a Contractor and Freelancer?

Whilst contractors and freelancers are very similar, there is a slight difference between the two. Generally speaking, a freelancer might work for several companies at the same time – perhaps on an ad hoc basis as and when required, from home or their own premises – whilst contractors normally work on only one contract at a time, in the clients office with terms spelled out in a contract.

Benefits of Becoming a Contractor

Here are some of the benefits you could enjoy as a contractor:

• Be your own boss – decide what work you take on, what hours you work and when you go on holiday.
• Benefit from your skills and expertise – instead of a company making money out of your talent, you will.
• Focus on the work you enjoy and are good at.
• Some industries have contractors that make more money than is possible as an employee.

Negatives of Becoming a Contractor

It would be wrong to pretend that there are no downsides to this type of employment. You have to make sure you are comfortable with the potential negatives before you proceed. This could mean you:

• Won’t have the security of a long-term employment contract.
• Have to be able to organise your accounts (or use an accountant).
• Don’t have the infrastructure of a HR department or IT team to fall back on.
• Have to be able to source and secure work for yourself.
• Won’t be able to enjoy other employee benefits such as sick pay, company pensions or bonuses.

Don’t let this list put you off – just don’t go into life as a contractor without an awareness of the potential drawbacks.

What You Need To Become a Contractor

So, how do you begin? Firstly, you need to establish a business structure, typically as a limited company or as an umbrella company. In most cases, you’ll be able to reap the best rewards by setting up as a limited company, as this provides more advantageous guidelines for tax and expenses. Umbrella companies are best suited to those who only wish to be a contractor in the short term, or who are caught by the Government’s IR35 rules (see below). See more on business structures with our guide.

Then you need to win some work. You can do this through approaching your existing contacts but it might well also be worth getting in touch with recruitment agencies, especially when you are first starting out and making a name for yourself.

When you do begin to look for work, be sure that you have following: 

• Resources - you’ll need the right resources available for the task
• Management systems -a system to manage your time and contracts effectively is essential.
• Rate card – work out an ideal rate to charge and/or a general pricing framework.

You also need to think about the optimum time to leave your existing job. Becoming a contractor means leaving behind a paid position, and you don’t want to do this before you’re ready – either from a financial or an organisational perspective.

IR35: Legislation to be aware of

Contractors have to be especially aware of what is known as the ‘IR35’ legislation. This is the Government’s way of ensuring people claiming to be contractors are not in fact ‘disguised employees’ who claim to be contractors in order to save tax.

 If the Government finds you shouldn’t be treated as a contractor, then you could be hit with a big bill for tax and National Insurance payments. Contractors who know their work will fall under IR35 may be better off establishing an umbrella company and taking a salary via PAYE to avoid an issue.

 These rules are complex and so it’s important that you speak to an expert to ensure you can clearly demonstrate your status as a legitimate self-employed contractor. Read more on this with our guide to IR35.

Tackling Potential Risks New Contractors Face

There are a number of potential risks you could face when starting out as a contractor. To help mitigate these, make sure you:

• Read and understand the terms of any contract you take on. Don’t be caught out by the fine print further down the line.
• Keep accurate records of your incomings and expenses to be able to keep on top of your books.
• Are protected in case your work is challenged. Protect yourself by taking out an insurance policy that is geared towards your circumstances and can cover you for legal action, in the most serious of cases. Insurance could cover everything from damage you cause while working in someone else’s office right through to a business claiming compensation because they feel your work was insufficient or inaccurate.
• Prepare to struggle for work in the early stages. Don’t expect to be overrun with orders right away – and use recruitment agencies to build a reputation and set realistic expectations for the first few months.
• Are up to date with the latest legislation. Pay careful attention to any changes to the IR35 rules , for example.

Keep these in mind, and do all the planning and preparation work required, and you’ll be well-placed to reap the rewards.