Contractor's Guide to Moving from Permanent to Contracting

Top tips on what, why, when, how and in what order!

Download your free guide on Moving from Permanent to Contracting here.

On the whole, contractors can earn more than their permanent counterparts, which is only fair considering the benefits that they have to give up. This step-by-step guide will tell you how to find and what to look for in a contract, as well as giving details on the various ways to operate – e.g. how to actually take home an income from your contract.

Finding a contract

The good news is, despite the fact that the economy is still recovering, the demand for contractors, freelancers, interim managers and consultants doesn't appear to have slowed. Corporates, and even government agencies, are turning to this highly-skilled and mobile work force to perform tasks and manage projects. Contractors and interim managers offer far more flexibility and are a lower long-term cost option, compared to taking on permanent members of staff.

Finding a contract is really no different to changing jobs. You’ll need to make sure your CV is fully updated and then target recruitment agencies which specialise in your particular field.

Ways to operate - Limited Company or Umbrella (and the perils of IR35!)

Click the following link to review our comprehensive comparison table which indicates the differences between working through your own Limited Company or through an Umbrella Company.

Essentially, if you are outside IR35 and intend to be contracting for over three months, you’ll more than likely take more money home if you work through a Limited Company, but you’ll have to do more administration than you would if you opted to work through an Umbrella Company.

So, more money but more work through a Limited Company and less work and less money through an Umbrella Company.

IR35 – this was launched by the government in order to stop permanent members of staff from switching to contracting but retaining the same benefits, risks and working practices as an employee, as well as being able to take more money home by working through their own Limited Companies.

Providing you take the necessary precautions, such as ensuring that you meet all of the conditions in your contract required to stay outside of IR35, and your working practices reflect the contract, then you really have very little to worry about. Click here for further details about IR35.

Working through your own Limited Company - timeline for getting things ready

If you choose to operate through your own Limited Company what do you need to do first and what is the timeline?

1. Establish your IR35 status

WHEN: before you sign your contract

As soon as you find a contract and you have accepted it, try to establish whether the contract is OUTSIDE IR35 (sometimes called IR35 friendly) or in INSIDE IR35 (caught by IR35).

Even if your contract is inside IR35, in financial terms it may still be worth working through a Limited Company, as you will only pay tax on 95% of your contract (rather than 100% if you work through an Umbrella Company) and you will also still be able to benefit from the Flat Rate VAT scheme.

The Flat Rate VAT Scheme is an incentive provided by the government to help simplify taxes. It means you charge VAT on your invoices at 20% but only pay back 13.5% of the gross amount in your first year and then 14.5% in subsequent years.

This provides the following additional income (based on a 45 week working year):

  • £200 per day contract - £1,710 extra profit per year
  • £350 per day contract - £2,992.50 extra profit per year
  • £600 per day contract - £5,130 extra profit per year

2. Form a Limited Company

WHEN: Ideally organised 5 to 7 days before you sign the contract, but can be the same day if necessary.

Forming a Limited Company only takes five minutes. You will need your Limited Company name, certificate of incorporation and company registration number before you start work, as the contract will need to be in the name of your company. If you form a company using SJD’s online service, you will have all of these within four hours of forming.

Our online company formation service is extremely popular with over 95% of contractors using it prior to becoming a client. The fee is only £125 plus VAT, which is one of the lowest fully inclusive fees in the market, you can buy cheaper but they very rarely include everything you need or offer any after sales service.

Our formation service offers same-day formations and includes opening a company bank account, VAT/PAYE registration and advice on share structure, click the following link to use our free limited company name checking service.

3. Appoint an accountant

WHEN: Ideally a few days before, but can be done at any point

Take home pay, dividends, expenses, profits, salary, benefits, personal allowances, tax planning . . . You are likely to have 101 questions, and your accountant will be able to answer them all, guiding you on the most tax efficient way to operate your Limited Company. Click here to see just what your accountant will do for you. Click here to appoint SJD Accountancy.

SJD offer a complete fixed fee package including: completion of accounts*, payroll bureau, dividends, corporation tax computations, personal taxation, free bookkeeping software, access to your own dedicated accountant*, company returns, in fact, everything you need for a fixed fee of just £120 plus VAT per month.

4. Open a Business Bank Account

WHEN: At least seven days before you are due to be paid

If you want to get paid you’ll need one of these! If you form your company with SJD Accountancy, we will send you an application form for a business bank account which will take a few days to open.

SJD Accountancy recommends Metro Bank. They offer free business banking to clients of SJD and you only need a £1 to open an account. Of course you are entirely free to use any bank, but due to Metro Bank’s high level of customer service, good interest rates.

4. VAT registration

WHEN: once you have formed your company

There are a two different ways to operate. One is the standard way, where you claim back VAT on items that you buy through your company - and the other is the option that most contractors take, which is to sign up to the Flat Rate VAT scheme.

It takes around six weeks to get your VAT number. During this time you’ll invoice your clients (we'll provide you with a template invoice) without VAT and when you are issued with your VAT number you can simply raise VAT-only invoices.

Most contractors choose the Flat Rate VAT Scheme as, on the whole, you won’t be buying that much in the way of company related items and you will make more money by opting for the Flat Rate Scheme.

Administering your own Limited Company can be simple, efficient and inexpensive when you have the help of a specialist firm like SJD Accountancy, which is dedicated to contractors and freelancers. Most importantly, it ensures that you minimise the amount you pay in tax legally, so that you can retain the maximum amount from your contract.

If you have any questions about contracting or would like any further advice please call our New Client Services helpdesk on 0500 152500 / 01442 275789 or email nikki.hanlon@sjdaccountancy.com.

You may also find the following guides useful:

SJD Accountancy

SJD Accountancy are the UK's largest specialist provider of fixed fee, Limited company accountancy services to contractors; we've been acting for contractors across the UK since 1992 and have more than 15,000 clients.

We are the only national specialist firm of contractor accountants with offices nationwide. SJD Accountancy has more qualified staff than any other firm in our market with qualifications from the following major tax and accountancy bodies - ATT, AAT, CTA, ACCA, CA, ACA and FCCA.

  • Unlimited face to face meetings. This is a unique service only SJD Accountancy offers - unlimited face to face meetings across the UK - tax is complicated and sometimes only a meeting will do.
  • UK's Largest contractor accountants with more qualified staff. No call centres, no outsourcing, no automated call handling. Simply telephone, email or meet your own dedicated accountant* face to face.
  • Money back service guarantee. All your telephone calls and emails will be answered the same day or we will make a full refund of that months fee.
  • Outstanding reputation. We have won more awards for customer service and accountancy excellence than any other firm in our market, including: Best Accountant for Contractors, Accountant of the Year and Best Professional Service Team to name just a few.
  • All inclusive low cost fixed fee accountancy package which includes completion of accounts*, payroll bureau, dividends and corporation tax computations, personal taxation, free bookkeeping software, your own dedicated accountant* and all company returns for a fixed fee of £120 plus VAT per month.

If you have any questions about contracting or would like any further advice please call our new client services helpdesk on 01442 275789 or email: janice@sjdaccountancy.com.

Appoint SJD Accountancy and never worry about your tax or accountancy affairs again.

Form your own Limited company with SJD - our same day online company formation service includes company bank account set up, VAT/PAYE registration and advice on optimum share structure. 

You may also find the following pages, guides and case studies useful:

*If you would like us to complete your company year end accounts we simply ask that you have been a client of SJD for one year or have made 12 monthly payments. All accountants are part or fully qualified.