How Do I Become a Contractor?

Deciding you want to work for yourself as a contractor is exciting, but it’s completely normal if you feel a little nervous or confused. Whether you need help deciding on a business structure, or you want to know more about IR35, we have plenty of resources for contractors to guide you through each step of the way. So where do you start?
 

What is a contractor?

How do I register as a contractor?

Do contractors need to be mindful of IR35?

How much can I charge as a contractor?

What if I have subcontractors?

How do I find work as a contractor?

Tips for a contractor’s next steps

Likes freelancers, contractors have a specific set of skills and qualifications which they provide to clients on a self-employed basis. Unlike freelancers who tend to work on an ad hoc basis, contractors usually offer out their services to clients for a contracted period – which can make it more secure than freelancing.

Contractors can operate in any industry, from IT to cleaning services. For example, one contractor could be a construction manager while another works as a painter.

Just like being self-employed, contracting refers to the way you work, so it isn’t actually a legal business structure. This means you’ll need to do some research on the different types of structures available, to find which one is right for you.

For example, let’s say you work in a particularly high-risk industry. In this scenario it may be better to run your business as a limited company, because this limits your personal liability if anything goes wrong and the business can’t pay its bills. Operating as a sole trader could put your personal assets at risk, because there’s no legal separation between you and the business.

There are other factors that could affect your decision too, such as how much profit you reasonably expect to make. This is important because the way you structure your business can affect how tax efficient it is, so higher profits might influence which one you choose. It can be a lot to take in, and the final decision will depend on your own circumstances and preferences.

 
 

Can I work through an umbrella company instead?

If the thought of going self-employed is too much (we understand it can be overwhelming with lots to think about), you might choose to work for an umbrella company instead. They’re often used by recruitment agencies, but they’re also common in other industries.

The umbrella company will ‘employ’ you, paying your wages through PAYE much like a regular employer would, and the claiming this back from the client you do the work for. It’ll still be up to you to find work though, so you have the freedom to choose your work and your clients, whilst they take care of the difficult bit – your taxes!

Just beware potential signs of fraudulent activity. It’s worth doing some due diligence before signing up to anything – and always check your payslips!

If you’re contracting through your own incorporated company, then yes – you most definitely need to keep an eye out for contracts that ‘fall inside’ IR35. If you’re unfamiliar with IR35, this is the name given to legislation preventing what HMRC calls ‘disguised employment’, where someone works through their limited company when they would otherwise be working as an employee of their client if the company didn’t exist.

Contracts which are subject to IR35 rules are said to be ‘inside’ IR35, and the person who hires you will deduct National Insurance and income tax from your gross pay, just like an employee, minus the benefits of being one. Many contractors try to avoid IR35, because it can affect your cashflow and means more record-keeping which can cause more hassle.

 
 

Who decides if I’m inside IR35?

It’s usually the company hiring you that is responsible for determining your IR35 status, unless they’re classed as a small company – in which case, it’ll be up to you to determine your status!

While what’s ‘inside’ and ‘outside’ of IR35 is often up for debate, there is a general rule; if it’s hard to differentiate between you and your clients’ actual employees – you’re likely to be inside IR35.

It’s worth noting that although IR35 doesn’t apply to sole traders, there are rules around the designation of employment.

If you’ve spent most of your time in employment, deciding what to charge or giving someone a quote can feel a little daunting. You’ll find many contracts are actually advertised with a set rate already, so this can help you determine how much companies are paying their contractors for when you need to give a quote.

The first thing to remember is don’t undersell yourself. Look at:
 

  • How much contractors with a similar level of skill and experience charge
  • The job itself – for example, how long it will take, and the complexity
  • Your expenses for carrying out the work

If you’re in the construction industry and have your own subcontractors, you’ll need to sign up as a contractor for the Construction Industry Scheme (CIS).

Once registered, you’ll have various other responsibilities, such as deducting advance payments for tax and National Insurance from your subcontractors’ gross pay and reporting this by submitting monthly CIS returns.

You’ll often be able to find work through job boards, as well as by signing up to agencies. The agency will either put you forward for jobs or refer various contracting roles they think you should apply for. Don’t get them confused with umbrella companies – you’ll need to sort your own taxes out!

It’s useful to network too – you never know who you may meet that needs a contractor, or knows someone who does.

You’ll often need to have your CV and portfolio ready, but you might also need to prepare a pitch for specific contracts, detailing things like costings and timeframes. To make life easier, you can create a template and personalise it where needed.

Like most new businesses, once you decide to become a contractor there are several steps to think about:
 

  • Opening a business bank account (this is a legal requirement if you’re a limited company)
  • Marketing and promoting your business
  • Where you’ll find your initial clients
  • How you’ll invoice clients
  • Your bookkeeping – it’s a legal requirement to keep records of your earnings and business spending, so finding the right software or way of doing this is crucial.
  • What tax returns you need to submit and when you need to pay

 

Top tip from the experts

Take care of your bookkeeping from day one! It will help you manage your cash flow efficiently, stay on top of client invoices and payments, and submit your tax returns much more easily.

 
Good bookkeeping habits are a must for any contractor. Learn more about how we can help with out cloud-based bookkeeping software, or take Pandle for a spin for free today.


Rachael Anderson

A creative content writer specialising across business, finance and software topics. I have a love for all things writing, and creating engaging, easy to understand content that helps everyday people!


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