We have put together this brief article to give you all the information you need to decide whether or not to transition into contracting if you are thinking about doing so.
Why should you consider contracting?
There are several benefits to taking on a contract role, including:
- You have considerably more control over your work schedule and may tailor it to fit your lifestyle and create a better work/life balance.
- You can set your hourly or day rate to create a higher earning potential, and companies will often pay more for access to specialised skills for the duration of a contract.
- Get experience working for various companies and interacting with a range of people; this will help you expand your professional network.
- The variety that comes with working in contract roles can expand your industry knowledge, skill base and experience.
- Contracting allows you to work in diverse settings and environments and specialise in specific industries or a niche area.
What should you consider before starting contract work?
You have a great chance to take charge of your career by contracting, and for some people, it’s the best choice they’ve ever made. However, quitting a permanent position is not without its risks. We’ve compiled a list of six factors to think about before switching to assist you in deciding whether or not to pursue contracting.
How will the change affect your way of life
It’s crucial to think about how accepting a contractor job will affect your lifestyle before accepting one. You could have to make a total lifestyle adjustment depending on the contract’s location, type of role, and duration. Certain contract positions may require living away from home, so it’s crucial to consider the financial implications as well as the disruption to your family life or home life.
What are the financial implications
The salary attached to contracting roles will largely depend on the demands in the market at the time and the nature of the project. Depending on the role and current lifestyle, individuals may need a significant pay increase to help cover the higher expenses sometimes associated with contract work and to make the switch to contracting.
It’s also crucial to remember that, in contrast to a permanent job, working as a contractor does not guarantee there will always be work and you will get paid. To make sure you are not out of pocket, it is advised that you have savings to cover job gaps and any unexpected costs.
It’s also quite important to think about when you will likely get paid for the work you have completed. In contrast to full-time employment, payment timelines between recruitment firms and end clients are often varied. For instance, they might use 60-day periods for payments, which would require you to wait two months to receive your first payment.
Will you set up a limited company or use an umbrella company?
All of the perks that you would have had as a permanent employee are now your responsibility as a contractor. One method contractors can seek assistance in sorting out all of these concerns is by using an umbrella company. Taxes, pension payments, holiday pay, and other statutory employee benefits like sick pay and maternity/paternity pay will all be handled by the umbrella company. However, because you would be liable for PAYE tax, just like permanent employees, using an umbrella company will result in a lower take-home pay than forming a limited business.
For contractors, forming a limited company is another alternative. You will receive a higher take home pay as a director of a limited company since you will be able to use a combination of dividends and salary to pay yourself. However, you will be in charge of your own insurance, annual accounts, tax filings, and pension plan. Many contractors choose to appoint a contractor account to assist with these tasks.
The choice between using an umbrella company or forming a limited company is ultimately based on tax laws known as IR35, or off-payroll working rules. April 2000 saw the implementation of IR35 throughout the United Kingdom, which was introduced to distinguish between contractors who work as “disguised employees” and contractors who operate as genuinely self-employed enterprises (via a limited corporation commonly known as a personal service company).
HMRC believed that contractors were avoiding paying the correct amount of taxes by utilising a Personal Service Company (PSC), such as a limited liability partnership or limited company, to deliver their services. We refer to these contractors as “disguised employees.” But in reality, they function more like an employee of their client (the end hirer) and aren’t truly providing a business-to-business service.
Regarding IR35, there are two expressions used that describe your status. Contractors who are “outside IR35” are genuinely self-employed, those who are “inside IR35” are treated as employees for tax purposes and must be paid via HMRC’s Pay As You Earn (PAYE) system.
HMRC updated the off-payroll working restrictions for the public sector in April 2017 and for the private sector in April 2021. The changes meant that determining the contractor’s employment status was now the responsibility of the end client who engaged them. Prior to the off-payroll reforms, it was managed by contractors. The amendments entail that the fee-payer is now accountable for deducting and paying the necessary tax to HMRC on behalf of the worker.
Do you have the right skills and mindset?
You should assess your reasons for moving forward when contemplating a contract role. It’s all about having the right reasons for making the switch. Do you want to start contracting, for instance, to gain experience in a different area, develop new skills, or improve your work/life balance? As a contractor, it is your duty to fulfil and finish the assignment you have been engaged for, and you should always make sure you provide the client with the best possible service.
What’s stopping you from starting your contracting career?
Now is the time to think about making the change; start contracting, start consulting or at least consider what you gain by working for yourself. If you want to advance your career and broaden your skill set, think about contracting or consulting before looking into changing positions within the organisation or for a different organisation.
Start your contracting career today
If you are considering making the move to contracting and would like to speak to a contractor accountant or an umbrella company to determine which option is better for your circumstances, we have created a directory of contractor accountants and umbrella companies for you to view.
Our top 10 accredited umbrella companies are all accredited by the FCSA or Professional Passport and ensure the supply chain of temporary workers is compliant. Why not get a free take home calculation or request a callback to find out more about their service.
