Becoming a contractor

I've had a few people ask about contracting, and how they ought to go about it, so I thought I'd distill some relevant thoughts here on the topic. I work in tech, but technically this should apply to contracting in most fields.

Why do you want to become a contractor?

This is the first question you should ask yourself, because its answer might dictate whether a) it's actually worth it for you, and b) the kinds of contracts you're willing to take on.

For some, it's the freedom to work on their own projects or own clients outside of work, and dictate their own working hours. For others, it’s the slightly higher pay (since you likely won’t receive any company benefits of any kind, this is typically offset by slightly higher pay for the work you’re doing than if you were in full-time employment). It could also just be the ability to work on different types of projects at different kinds of companies.

But you also loose many of the things a permanent role gives you. You’re usually not eligible for any company benefits. This includes everything from company vacations and retreats, to access to any training the company gives their employees. There’s typically no career guidance or goal setting with a manager at all, because you likely won’t be there for a long time. There’s no incentive for them to invest in you. 360 performance review? Don’t know her. In fact, taking any company benefits jeopardises your position as a contractor, more on that later.

There is of course nothing stopping you from asking for advice and career tips from the people you end up working with, and I highly recommend this because people are awesome. But as a contractor, you shouldn’t expect anything structured as part of your work. You’ll need to pay for any training yourself and do it in your own time.

You’re also giving up job stability. It’s not always easy landing a new contract and you will often have time off between work. Contracts can be 3 months, 6 months, and even 12 months long, all depending on the client. But there will always be some level of uncertainty and you need to be okay with it, or at least be willing to learn to be okay with it. While on this note, you should also have a few months’ worth of savings before you start looking.

All in all, it’s important to make sure your reasoning for going into contracting are well-founded and you’re happy with the trade-offs.

Finding contracts

So let’s say you’re sure you want to take the dive. LinkedIn is your best friend. Not everyone is a fan of having a profile on the service, but it’s genuinely a really great way to share your experience, and more importantly for recruiters to be able to find you. Especially when you set your profile to “looking for work”.

I wasn’t a fan of having recruiter connections on LinkedIn early on, I had this “you need to actually know know everyone you’re connected with for your network to really benefit you” notion. But really, as a contractor, who is likely going to be looking for work more often than a permanent employee, recruiters are your buddies.

Develop a long-term relationship with the recruiters you connect with, explain your interests, goals, and technologies you’re into, and they more often than not work hard to find the work that best fits you. And if they find a role that doesn’t fit you well, but you know someone who would be perfect, forward them! The better your relationship, the more likely they’ll think of you when a new contract lands on their desk.

Not all recruiters are the same though, it can sometimes feel like they’re gatekeeping certain positions or companies, since it’s up to them whether they will forward your CV to the client. But I haven’t found this to be a recurring problem.

You also have to be really quick to respond to recruiters and job ads online because contracts tend to get snapped up really quickly. It can sometimes seem like you gotta take what you can find (ahem 2020 ahem COVID). Patience is really important, I spent about 4 weeks last year hunting for a contract, only for a recruiter to reach out about a contract on a Thursday night, have a phone interview with the CTO on Friday, in person interview on Monday, and started on Wednesday, so all less than a week from finding out the company even existed. And that could’ve easily been someone else if I took my time replying to the recruiter initially.

Beyond LinkedIn, job boards like CW Jobs and Total Jobs usually have plenty of adverts, as well as the ability to upload your CV and make it publicly available to recruiters.

I would say spend some time searching on all of these before you take the dive to see what kind of contract roles are available currently and how you feel about them.

How the contracts work

All of the contracts I’ve had have been through recruiters. Once you’ve gone through the interview process with the potential client, and you’ve landed your first contract, what will typically happen is the recruitment agency acts as an Employment Business. This means they act as a middle man between the client and your company, drafting up the relevant contracts etc. You technically enter into a contract with the recruitment agency, and so does the client with their own contract. The client pays the agency (a little more than what you get paid, hence one of the ways they make their moniess), and you get paid the agreed rate by the agency.

This is how contracts have worked for me so far. It is possible to take on a contract directly with a company, in which case you (your company) would have to take the initiative to draft up your own contracts (should probably involve a lawyer).

Not all contracts are made equal (IR35 enters the chat…)

It’s important to be aware of IR35 legislation, and what it means for the different types of contracts you’ll encounter. It requires in-depth reading itself, so I’ll link some resources at the end, but here’s an overview.

IR35 legislation, also known as Off-Payroll working rules, is a set of government legislation designed to prevent disguised employment.

In a nutshell, if you’re running a company and have clients, then you should be behaving like a company. You shouldn’t set up a company just to contract so you can end up paying less tax, which is the entire reason HMRC introduced and revised this legislation.

Whether a contract is determined to be Inside or Outside IR35 has implications for how you pay tax.

A contract that is considered Outside IR35, is one where you’re genuinely in a company-to-company relationship with the client you’re doing the work for. There are specific indications that point towards this that HMRC will look out for. Can you dictate your own working hours? Do you provide your own equipment to carry out your work? Do you have the ability to send someone as a replacement on your behalf? Can you carry out work for other clients alongside this contract? There are other indicators, but the more of these you answer Yes to, the more likely it'll mean your contract would be considered Outside IR35. This would mean that your company would be paid the entire agreed amount in full, and it would be your responsibility as director of your company to manage your own taxes, and pay yourself as a PAYE employee of your own company.

If the answer to some of these is no, it could be your contract might be determined to be Inside IR35. If this is the case, it’s the responsibility of the client / employment business to deduct PAYE Income Tax and National Insurance from the full amount before paying you, the same as a permanent employee would have their Income Tax deducted before the money hits their account. This is because your relationship with the client resembles that of an employee. A really important point is, it's not necessarily about whats in the paper contract you signed. It's about what your actual working relationship looks like.

Still with me?

Recently, the onus of determining whether a contract is Inside or Outside IR35 fell towards the clients that are looking for contractors. This has meant the number of contracts that are Outside IR35 have decreased, since many companies are trying to mitigate the risk of misidentifying a contract.

If HMRC believes your contract is Inside but you’re working as if it’s Outside, they can launch an investigation to find out. And if it turns out how you work doesn’t match your IR35 designation, both parties could be liable for hefty fines. So it’s pretty important to get your head around it all. It can take some time, but do the reading!

As a last point on this, if you’re taking on an Outside IR35 contract, you’re expected to have your own Limited company that will be providing the specified services, and you’ll have to manage the paperwork yourself. If it’s an Inside IR35 contract, you’ll typically have to work through an existing Umbrella company, which will handle the paperwork and logistics, including deducting the correct amount of income tax and national insurance. You’re usually given a few Umbrella company options to choose from by the client / employment business.

Setting yourself up for Outisde IR35 work

I don’t have any experience with Inside IR35 contracts, so I’ll speak a little on the basics of what’s required to set yourself up as a contractor for Outside IR35 work.

Forming a company

You’ll obviously need to create a company. You can do this directly on Companies House and it costs £12. However, it’s worth bearing in mind that you need to provide a registered address for the company, and all company information is publicly available on the Companies House website. This includes information about the directors and their addresses. There are services that allow you to register a company through them, and not only do they handle submitting the application to Companies House, but they also provide virtual addresses that you can use to keep your own personal address private. There are tons of these, so google for a bit. But I use the privacy package from Your Company Formations.

Banking

You need a company bank account that is separate from your personal bank account. This is very important. You can use any business bank account you fancy.

Accounting

There are certain records you have to keep as a director of a company. You could manage these yourself, but I highly suggest you get an accountant to help you with it.

Ultimately, you’re running a limited liability company, and as a result there are responsibilities you have as a director that you can’t afford to not be aware of. There’s paper work and deadlines for forms that you need to stay on top off, just like any other company, and having an accountant makes it all much easier.

I use Crunch Accounting to manage all of my accounting. They provide software to manage invoices, sales etc, and they also provide a team of accountants to answer any questions you have. You can sign up using my referral link if you’re interested. There are of course plenty others available, but not having an accountant isn’t really a smart option in my humble opinion.

Business insurance

You won’t be able to take on any clients without business insurance in place. I use Kingsbridge Contractor Insurance which was recommended by a friend. You can get a free quote using this referral link.

And that’s it, that’s everything I could think of. This was a long one, but I hope it’s been useful for anyone considering getting into contracting. If you have any other questions feel free to tweet me!

For the sake of clarity, nothing in this piece includes any financial or legal advice. You should speak to actual accountants or lawyers if you need proper advice. Below you can find some useful reads.

Useful reads

GOV.UK - Setup a limited company: step by step

HMRC - Important facts for contractors - off-payroll working rules (IR35)

Crunch - What is IR35? + Business Guide

Crunch - Who determines your IR35 status and who pays employment taxes?

Crunch - Free IR35 assessment calculator

GitHub/tadast - Switching to contracting UK

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