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New to Contracting

Before you make any decisions on the way you want to work, you must consider your employment status carefully and ensure you are in a suitable position to establish yourself as a Freelance Contractor.

While there are significant benefits to contracting, there are also risks and responsibilities involved, and forward planning is essential for sustained success. There is significantly more support and guidance available by using a variety of resources, from online guides to accountants and recruitment agencies, enabling you to make an informed opinion on all the options available to you.

Budgeting and prudent financial management are important and ensuring that you are compliant is a crucial requirement - you will also need a clear understanding of employment and tax legislation so you can manage your affairs and mitigate the risks you may face.

The benefits of being a freelance Contractor include the flexibility of working patterns and personal control, not forgetting the potential increased pay and tax planning opportunities. Most Contractors can earn significantly more from contract fees when compared to an equivalent permanent or salaried role. In addition, the internet has made it much easier to access the contract opportunities, however, there is no guarantee of work and you need to be confident in your ability to find and successfully pitch and negotiate for your own contracts.

Contract lengths will vary but most are between 3 and 6 months long. More experienced Contractors will have a series of contract renewals during their careers and will find themselves at the same location for a number of years. The length and value of your contract may be negotiable but your working location will not, so it is important to be as flexible as possible. The roles within the contracting industry are diverse and you must anticipate a degree of new learning in every placement, however, as your experience grows, so will your ability to select the most appropriate roles for your skill set.

There are a number of ways of contracting your services when you start working as a freelancer:

Limited Company
Sole Trader
Umbrella Company
Agency PAYE

Limited Company - If you set up a limited company, you will become a director and shareholder - typically drawing a small salary and taking most of your income in the form of dividends. This is normally the most tax efficient way of contracting as dividends are taxed at a lower rate than PAYE salary and no National Insurance contributions are payable on dividends. As a Limited Company director you will also take on a number of legal, financial and administrative responsibilities but you will not be held personally responsible for any business related debts.

Sole Trader - As a Sole Trader you will own your business but you will not be registered as a Limited Company. This is a simple structure, however, you will still be responsible for your business’s finances and compliance, and you will be personally responsible for paying both income taxes and business debts. There are tax efficient opportunities when compared to working through a PAYE but these are currently not as great as working through your own Limited Company.

Umbrella Company - Under an Umbrella Company you will have a Contract of Employment and you will become an Employee of the Umbrella Company. After you submit your invoice or timesheet to the Umbrella Company, they will invoice the agency, take care of all administrative paperwork for you and they will pay you a net salary after deducting Income Tax and National Insurance contributions. You will also have the ability to claim tax relief on subsistence and business travel to the various temporary workplaces, as required to fulfil your contract.

Agency PAYE - Some recruitment agencies will allow you to work through their books and you will be taxed as an agency Employee. This means that your take home pay will be net of PAYE and National Insurance contributions, which will be paid over to HMRC by the agency, but you will not be able to offset your valid business expenses from your tax liabilities. The agency will provide you will all necessary insurances. This is the least tax beneficial option available to you as a Contractor.

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