How to Become a Contractor in the UK?
The Absolute Startup Guide for Contractors
When thinking about setting up on your own, it can seem a little daunting. Perhaps you have decided that you want the freedom to choose how you work by providing contracting services, or maybe you are in between jobs and are thinking of contracting. Whatever your reason, you will need to understand how to begin and what should be your first steps, our in-depth startup guide for contractors designed by our in-house contracting specialists will help you with all aspects of working as a contractor.
This startup guide for contractors will tell you everything you need to know about Contracting. It will help you to take the first steps on this journey while helping you avoid any possible mistakes and mishaps.
What Is Contracting?
Contracting is a process in which companies hire individuals to work for a specific project rather than hiring them as full-time employees; they are individuals who provide a particular skill set for a limited period as an independent contractor and not as an employee.
Contractors generally work independently on client projects instead of as an employee of the company. You will have more control to decide your hours and rate of pay for your services. A contractor is generally considered as a self-employed individual, they also work through their own limited company, providing services to a client for a certain amount of time.
Compared to working as an employee where you work according to the guidelines set by the employers, contractors have the freedom to choose their working hours, their holidays and how much they want to get paid for the work they do. Mostly, you are your own boss; many individuals turn to contract work to give them the flexibility they desire in life while also putting their skills and experience to good use.
Related: Keep your business healthy with these practical tips.
Why Become A Contractor?
There are many benefits to working as a contractor, it is for this reason many individuals select this way of working over full time employment. Contractors are often paid at a higher rate than employed staff and have the benefit of choosing the projects they work on rather than working on projects which might not be towards one’s liking.
Working as a contractor allows you the freedom to select the time you work, how much you work and when you take holidays. A contracting business offers flexibility, security, and independence that might be missing from a job. Additionally, you can earn income from multiple sources gaining valuable expertise and experience.
How to Become a Contractor?
If you are thinking of becoming a contractor, an excellent place to start would be to speak to professional contractor accountants who specialise in contractor accounting. The specialist Contractor accountants can offer you the chance to discuss your ideas with a contracting specialist who can give you tips on how to get started.
To start, you must have a clear plan set out in regards to becoming a contractor. It is not an easy thing to switch from a job to start your own contracting business. Look out for the expenses it may demand from you and the expense rate you can get in the marketplace.
Secondly, understand your target audience and their demands. The main thing you should consider before you start contracting is to complete the legal setup, attain the required permits, licenses, and register for taxes.
Video: How To Become A Contractor In The UK
If you are thinking about becoming a contractor in the UK, watch our quick video to learn about the key things you need to know to start working as a contractor.
How to Start as a Contractor?
Contracting is not limited to a single field or domain. In the UK, contractors can work for both the private sector and the government. General contractors are involved in construction and renovation projects and can be an organisation or an individual. IT contractors provide technical expertise to enable clients to optimise and manage the information for the business process.
Transport contractors, as the name suggests, are contractors who deal in providing transport services to institutions and entities. Subcontractors are Individuals or businesses that offer contractual services to major contractors and might be responsible partially or fully for a contract. Consultants are contractors who provide professional advice for different areas and domains. Locums are doctors providing contractual services to short-staffed hospitals in the absence of other doctors.
In some situations, a contractor might be at risk from IR-35 or may not want the hassle of taxes; for this purpose, they may decide to operate through an umbrella company. The umbrella company acts as an intermediary between the employer and the contractor. They are responsible for billing the client, collecting payment and passing the payment to the contractor or the firm through payroll.
The process thus operates efficiently as the contractor gets paid once national insurance and taxes are deducted through payroll, the contractor is not required to worry about National Insurance or other payroll taxes.
If you want to become a contractor but do not want the hassle of extra administration you can decide to go with the umbrella option which will reduce your administration burden and tax implications.
In this scenario, the umbrella company will sort out your income tax and national insurance, which means you don’t need to worry about those aspects of your finances. In this situation, you will still be able to control your workload but also have the benefits of a permanent employee. Our accountants can also help you to decide if this is the best option for you.
One way of setting up as a contractor is by starting a limited company, and this is a popular option for contractors as it gives the most control and can be the most sensible choice when it comes to tax.
The difficulty of setting a Limited Company is that you have greater requirements to fulfil and a higher level of responsibility. Starting a limited company means that you will be in charge of the accounts, taking care of invoices and expenses, and filling out your tax return. We recommend you hire a professional contractor accounting firm to help you manage the business properly.
The definition of self-employment has been clearly explained by HMRC (Her Majesty’s Revenue and Customs). Any contractor who does not fall into HMRC’s interpretation of self-employment is affected by IR-35. The IR-35 legislation stops employees from working at companies disguised as contractors for tax purposes.
IR35 applies when individuals identify themselves as contractors for tax purposes but are considered as employees of the company based on their working arrangements and due to receiving the same benefits as the employers employed staff, such as holiday pay, sick pay. You must declare that you are ‘inside’ IR35 if you find yourself in this situation, however, not reporting it can incur a hefty penalty and tax bill from HMRC.
To help you navigate with the complications around IR35, try speaking to a professional IR35 specialist who can assist you in making sure your work contracts and working practices adhere to IR35.
IR-35 does not apply to umbrella companies due to how they work and how they pay contractors. The umbrella company maintains payrolls and taxes on the profits of the contractors under PAYE. Hence the umbrella companies are not at risk of coming under IR-35.
You need to make sure that your company does not use any schemes that could be subject to a loan charge or tax avoidance scheme, as suggested by HMRC. In case your company comes up under the Loan Charge Program, talk directly to a tax accountant, or someone adequately trained.
How Brexit And Off-Payroll Impacts Contracting?
Data from 2018 reveals that approximately 45,000 UK contractors stay and pay taxes in the UK while the businesses are on the mainland. Others operate on short-term contracts or move to mainland Europe. As of now, many people can work in Europe, because Britain is part of the European Union, which makes some people very nervous about Brexit, because they may lose their chance to work outside the UK.
Businesses in Europe would necessarily prioritise recruiting workers in EU countries over people in Britain. However, not all of this will be a drastic change; there will be a transitional time in which contractors will be able to plan for life after EU membership. The transitional duration will last until 31 December 2020. In the transitional phase, the free movement of workers will continue to be the same as before and will allow contractors to pursue employment in Europe.
The updated off-payroll working rules move the responsibility of determining IR-35 status of a worker from the PSC to the hiring company. When you comply with and intend to comply with the current IR35 regulations, you should not be impacted as such, employers, on the other hand, might change their contracting roles to employment due to the complication of this new legislation.
Related: Find out more about how Brexit impacts contractors and VAT.
Other Key Factors To Consider Before Becoming a Contractor
Our guide to contracting explains various issues you may come across once you start contracting, There are some key factors you must consider even before starting up as a contractor. It is necessary to find the amount of planning and effort involved. Establishing a new company of any sort is never straightforward, and some things may not be at the forefront of one’s mind, even as an accomplished entrepreneur.
Plan a strong business strategy
Your business plan will set out the objectives of your contracting company. The procedure will provide comprehensive plans for each stage of the process, timeline, and funding that you will need to achieve each of your objectives.
Start compiling all the legal work
The best way to stay compliant and grow as a professional is by staying well-coordinated and productive which should enable you to follow all applicable legislation, laws, and standards.
Make sure to get all the relevant certifications, licenses, permits, and registrations required for you to provide contracting services. Hire a professional advisor or lawyer if necessary.
Look out for Tax requirements
Tax can get complicated, especially if you are new at it, try to hire a competitive tax accountant so they can figure out what paperwork you need and what tax amounts you can claim, they will also comply with filing requirements on your behalf and advise on potential tax savings and reliefs. Tax Investigations happen, so you must prepare beforehand to keep the records straight.
Insurance is a must
Arrange a meeting with an insurance agent and speak to them about the insurance policy you need for your company. You need to protect not only the company assets, but you also need to protect yourself from work-related accidents, personal liability, or harm to client assets. You must thoroughly guard yourself and the company. You cannot risk a newly started business in today’s marketplace by not applying for insurance. Our guide to insurance can be a good starting point.
Make sure finances are secured
You will need to buy, rent, or lease equipment, supplies, and vehicles to start your company. You would always need to pay the bills, spend on marketing plans, and make the payments. Before you bid on your first deal, you will need to raise funds, so apply early on for funding or source your funding from other sources, our funding guide can be a valuable resource during this process.
Networking is a must
No business works out well without proper networking. You must have a connection with the internal and external marketplace to maintain your place in the market. Open accounts with various suppliers and build relations with them.
You ‘re going to need to have a good credit relationship with other vendors to call someone in the time of need. It might happen in the field when unforeseen events hold your focus, and you feel unable to complete the contract, at that time, these relationships help you to complete your agreement within the designated period.
Take It Beyond Borders As A UK Citizen
Effective communication has made it far easier for individuals seeking jobs globally to transcend global barriers to work around the world. However, before you decide to move overseas to work as a contractor, you should prepare yourself to face unanticipated challenges early on and should be well aware of all the tax and visa requirements.
Before contracting overseas, shortlist the countries where you would like to work and conduct thorough research about the visa and tax requirements. Without the appropriate visa, you will not be able to apply for your desired contract positions and only waste the time by spending on looking for contracts.
In and Out of Europe
If you are a contractor from the UK and you are planning to extend your contracting services to the European Union, then the good news is that you can work in the EU without any visa requirements. However, this might change after Brexit.
It is advisable that you understand in detail the tax system of the location you plan to work in, as it can be significantly different from the United Kingdom. There might also be issues of double taxation which can be avoided if you speak to a competitive contractor accountant before you leave for the overseas destination.
When travelling overseas for work it is important that you have the correct visa which allows you to work, the requirements for the visa vary from country to country, you should get the visa requirements sorted before you make any travel arrangements. You might be able to get a local company for which you plan to contract, to provide you with a permit.
It is important to note that you must conduct thorough research on the opportunities available in the country you look forward to working in. Moreover, you should seek professional advice before working on your visa application. Try looking for an accountant nearby, they should be able to recommend a good immigration specialist from within their network, who should be able to help you with your visa requirements.
Where to Start?
To work overseas you will need thorough planning and research to know about possible opportunities. You should explore different options while considering the worth of such a venture, as it may cost extensively.
Contractors are responsible for their filings and taxes; failure to comply with these can create serious issues and fines. You might be liable to pay the fee on your foreign income or any income earned from sources in the UK while providing contracting services abroad.
Due to differing rules for taxes globally you will never be able to completely calculate the impact that tax will have from your global earnings. Working out your taxes in a foreign country may get very confusing and frustrating, so we advise you to speak to a competitive accounting firm or a tax accountant.
Approaching international umbrella companies can be another option if available, as they can provide you with several tailored solutions for your taxes and filings.
Find an Overseas Contract
It is best to find an overseas contract beforehand, but how? The best method to discover an overseas agreement is to appoint a recruitment agency in the country in which you plan to move. These agencies have built a network of connections with companies that require contract workers and should be able to match you with the right contract.
You should be able to google a list of registered agencies, you can also network on linkedin to find individuals who are already working in your destination country and can help. However, never rely on one source of information and explore different mediums to reach a final decision.
You can also find a professional advisor such as an accountant in the destination country that you plan to contract in, they should be able to guide you through the process of finding a contract and avoiding compliance complications.
Find Out if the Country is Safe for UK Nationals
Don’t leave the part where you also have to travel abroad to further establish the business. Travelling can become a hassle if you are not well-prepared for any unpredictable event. You must do a background check to find a suitable country to move for your contracting business.
The easiest way to check if a country is safe to visit is to check the travel advice on the UK official website.
It might feel challenging to keep up with all the hassles coming with this move. However, proper homework and research might be much more helpful in this regard than you ever imagined. A little time before the trip may save your time in the long-run.
In case, if you have already moved to another country and are facing any kind of difficulty, consult the local UK embassy or UKTI. Always keep in contact with the embassy to ensure further safety.
Tips and Tricks
Ensure that you have all legal documents
You should have with you all important documents, predominantly identification and visa when working abroad, you should also keep safe documents which can be asked for by local police, inspectors or employers such as financial records, police certificates etc.
Build your network
Try following events on social media platforms, which will help you build your system in the target country. You can also try attending events, seminars or training sessions, to build connections and understand the culture better. You can also use digital tools to help you network such as joining facebook groups or locating key people to connect to on linkedin.
Use the local telecommunication network
The roaming charges are quite expensive in foreign countries so it’s better to get a local sim, this will make communication easier and less costly.
Keep cash in hand
Keep some money in hand, as certain local vendors might not accept credit cards, such as taxi drivers or local shopkeepers.
Learn about the local culture
When you have selected your contracting destination you should gather as much information as possible about the location, things such as language, currency, key to do’s and not to do’s. You should also research the traditions, religion, culture, and other customs of the particular area you wish to reside in, to be more respectful.
Secure Your Finances
We have already emphasised the importance of financial security; here are the few tips to make it possible.
Insulate your income: Speak to a competent contractor accountant about how you can use the excess cash in your business as an investment or a cushion for times when there is insufficient income generation. Our tips for growing surplus cash have been useful for this purpose.
Spread your income within the family: You can capitalise by employing family members and using their tax-free allowance. However, you must take expert advice to help you optimise any loopholes of saving money without the complications of tax investigations.
Set Up a rainy day savings account: You should open a savings account if you do not have one, and start saving funds for an emergency immediately.
Get a Relevant Life cover policy: With relevant Life cover, you will significantly save on income tax.
Get a pension plan: In case your company has any retained profits, carry forward the unutilised pension allowance, thereby using the pension to pay yourself in a tax-efficient manner. We have provided a detailed overview of pension for contractors.
Related: find more tips for contractors and freelancers.
Pensions for Contractors
As an employee of an established firm, your taxes and pensions are mostly well-sorted. However, if you are providing contracting services as a contractor in the UK, you will have to fulfil most of the obligations yourself.
Few contractors pay attention to the prospects of investing in a pension fund. Pension, not only does it have the potential to provide substantial tax relief, but it also has the potential to leave the contractors with more money to spend after retirement.
Pension funds are protected from insolvency by law. Hence your pension savings will be secure. Income earned by contractors, business owners and employees is taxed in different ways. If they contribute to a pension fund, the contribution amount will provide a tax relief towards the tax that they have to pay.
Claiming expenses as an employee is usually a simple matter, either you pay the costs in advance and claim them back by providing a receipt or using a company credit card. The procedure is close to that of the contractor; however, you need to be much more aware of what you can and can not demand and keep consistent records.
Contractors can claim the following costs as long as the expenses have been incurred as a result of their contractual duties and have receipts that the expenditure has taken place. If you are operating through a limited company, your allowable expenses will depend on your IR35 status, so it is better to seek advice from the best IR35 specialists London has in your business area.
Tax-deductible business expenses are the expenses that you can subtract from a company’s income before they are subject to taxation. These expenses may include the accountant’s monthly fees, legal costs, business insurance, and other professional costs.
Claiming computer equipment expenses is permissible if purchased for the business. However, make sure to check with a contractor specialist if you think you might be on a flat rate VAT scheme as this will mean you can only reclaim the VAT amount on costs that exceed £2000 on a single receipt.
Pension expenses: You’re eligible for a tax break if you’re making pension contributions to a scheme approved by HMRC against any corporation tax you pay.
Related: These are only a few costs that you can claim, Learn more about seven cost-cutting expenses.
Common Mistakes in Contracting
Contracting is not an easy path; that’s why many contractors make common mistakes at the beginning of their career as a contractor. Our startup guide to contracting helps contractors start with the utmost efficiency, we have also summarised the key mistakes contractors generally make.
Working without a Contract: One of the most common mistakes made by contractors is delaying the process of finalising a contract. The delay can be due to multiple reasons. Therefore, to keep the cash flow running smoothly, it is vital to seek a potential extension to an existing contract early on or to look for a new deal a few months before the current one expires.
Coming inside IR35: You are considered high risk and inside IR-35 if you work as a contractor and utilise tax advantages of being a contractor but can be considered an employee when your working arrangements are assessed for tax purposes.
Not having enough legal protection: The possibility of a client claiming damages against you is very much there so you must have adequate cover in place.
Improper record-keeping: A poor record-keeping habit creates delays in tax submissions, increases the amount lost deductions, and can create problems if HMRC asks any questions.
Not contributing to a pension fund: One of the most common mistakes is not to make contributions towards the pension fund and only to realise once it’s too late. Pension contributions can also reduce tax liabilities.
Not hiring proper help: Many contractors believe that they can save money by managing their accounts. An expert accountant will help you stay in compliance with the legal obligations and will ensure that you are fulfilling the required legal standards.
Clear House Accountants are specialist Accountants in London who have years of experience working with thousands of contractors, providing them with smart solutions to save tax and improve cash flow. If you are thinking about contracting and do not know where to start to contact us now.
Frequently Asked Questions
Difference between Contractor and Employee?
Contractors are independent of the employer and will generally have more freedom to decide the hours they work and how they get the work done. They also have to bear the risk of their work and do not have the right to any employment rights. Employees are required to work for the employer, they have employment rights but are also bound to strict working guidelines as set up by the employer.
How do contractors get paid?
Contractors typically get paid hourly or daily rates, which they have to invoice based on their timesheets.
What is the legislation IR-35?
The IR35 legislation design tries explicitly to determine if a contractor is a genuine contractor rather than a disguised employee for tax advantages.
Do I need a Contractor Accountant?
A specialist can guide you on best practices, help you avoid costly mistakes and keep you on the right track with authorities. Hiring a competitive contractor accountant will help you save time, money and potential hassle in the form of investigations and incorrect compliance work.
What is the financial impact of hiring a Contractor Accountant?
The cost to hire a Contractor Accountant can vary, but you should be looking at something in between 50 to 150 pounds per month. It depends on your day rate, contract terms, and the number of contractors working through your limited company. Just make sure the price is a fixed fee and that the quote you get from your contractor accountant covers the services you require.
Anam has a degree in accounting from the Prestigious St John’s University, and works as a senior director in Clear House.
Before working in Clear House, Anam worked in various commercial roles, the last one being the VP Operations for a prestigious business organisation,working on improving the organisation’s operational efficiency, growth and high level client management.
Anam manages clients ranging from software companies to large property developers and managers. Notably, she recently worked with a large property development company building large scale developments in London and the surrounding area.