How to Start as a Contractor: A Complete Guide
Making the switch to becoming a contractor can be a daunting decision, particularly if you’re leaving the security of a full-time job with a steady income. Whether you’re choosing to quit your role or have been made redundant and are exploring contracting as your next move, this guide will walk you through everything you need to know about starting your journey as a contractor.
The Pros and Cons of Becoming a Contractor
Many professionals choose contracting over permanent employment for a variety of reasons. Below, we outline the key advantages and disadvantages of becoming a contractor.
Benefits of Contracting:
- Guaranteed pricing agreements
- Potential for higher income
- Tax savings (our specialist contractor accountants can help you take advantage of this)
- Greater job satisfaction from professional autonomy
- More variety by working on projects that interest you
- Flexibility to choose when and where to work
- No need to deal with difficult colleagues
- Full control as your own boss
Drawbacks of Contracting:
- Increased responsibility for managing your own business
- Lower job security since contracts are often temporary
- Potential need to relocate or travel frequently
- The challenge of securing continuous work to maintain income
- Pressure to meet tight deadlines
- No holiday pay during contract periods
- Risk of being impacted by IR35 legislation
Choosing the Right Business Structure for Contractors
When starting as a contractor, one of the most important decisions is selecting the right business model. Your choice can significantly impact your tax liabilities, and our contractor accountants can provide expert guidance to help you make the best decision. Below are the primary business models explained.
Limited Company for Contractors Setting up a limited company separates you from your business legally, providing “limited” liability. This means your personal assets, such as your home and savings, are protected if your company faces financial difficulties.
Unlike sole traders, who can face tax rates as high as 30% on their income, limited company contractors benefit from paying Corporation Tax and drawing income through a combination of a low salary and dividends, which reduces both tax and National Insurance contributions. Additionally, you can claim business expenses like equipment, travel, and office supplies, reducing your taxable profit and lowering your overall tax bill.
Sole Trader Option for Contractors As a sole trader, there is no distinction between you and your business, so all profits are yours. However, you’ll need to file a Self-Assessment Tax Return annually and contribute to National Insurance. Clients may be less inclined to work with sole traders due to the perceived risk, preferring contractors who operate through limited companies.
Partnerships for Contractors A partnership operates much like being a sole trader but involves two or more individuals running the business together. This can be a good option if you’re contracting with a partner or team.
Umbrella Company for Contractors Alternatively, you can choose to work under an umbrella company. As an employee of the umbrella company, they handle invoicing, tax deductions, and payment collection. This is a convenient option for contractors looking to avoid the hassle of admin, but it often results in higher taxes since you’re treated as an employee.
Get Expert Accounting Help for Contractors
At Accovis LLP, we specialise in contractor accounting, taxation and compliance. If you’re looking for expert guidance on how to manage your finances as a contractor, fill out the form below for a no-obligation consultation about your plans and how we can assist you.
