Guide to how Contracting works

You might also find our new How to become a contractor guide - illustrated infographic useful.

Contracting in a sector of work you feel passionate about seems like a great idea. Choose your own hours, work in your pyjamas, take long lunches . . . what could be better. Of course, in reality, it’s not quite like that. As a contractor you are 100% responsible for earning enough money to keep yourself afloat along with all of the other responsibilities that come with being your own boss. Some people find it easy to make the transition whilst others take their time to become more settled. This page may help answer a few question you might have.

What exactly is Contracting?
Webster's dictionary definition of a contractor is 'someone who contracts to perform work'. Well it's not the most comprehensive of definitions but it is very accurate. Some contractors work for just one client and then when that project ends they look for another, the project could last days, weeks, months or even years, other contractors have a wide variety of clients and spread themselves around. With either option the contractor usually operates on an hourly/daily rate or a fixed fee basis (click on the following link for an idea of take home pay through a limited company). Some also work on variable/fixed fees plus an end of project bonus or success fee although this is more common for marketing/sales contractors than in the IT sector.

Why do businesses choose to outsource to contractors?
There are many reasons why companies like to use contractors. For example:

  • Contractors are more flexible 
  • Contractors can cost less as there are less long term commitments
  • Contractors provide skills that the in-house team may not have
  • Contractors can complete one-off or small regular tasks that do not require a full time employee
  • Sometimes it's just easier to get a fully skilled contractor in than to recruit a permanent employee

What are the main reasons that people choose to go into contracting?
Every contractor has their own reasons for choosing this option. Some of the most common are:

  • Being your own boss - which can be extremely enjoyable and satisfying.
  • Making more money - contractors are paid a higher rate than full time employees who carry out a similar role.
  • Having freedom over working hours - being your own boss means you can, to varying degrees, choose when and where to work, when to take holidays and so on.
  • Experience a wide variety of work - by moving from project to project or working on multiple projects at the same time, contracting opens up opportunities where you can develop a varied experience and build an impressive CV.
  • Reduced tax liability - any accountant will tell that working through your own limited company is the most tax efficient way to operate. Which is only fair, bearing in mind the extra things contractors have to take care of when operating their own company. Visit this page for more on how to form a limited company.

Do I have to work out of an office to work as a contractor?
This is really up to you in terms of how you want to run your business. Some contractors will always aim to work on a customer site – this usually works best if you are handling one project at a time. However, if you are working for multiple clients, then realistically you will need your own office. This does not have to be anything fancy. Many contractors operate from a spare bedroom or even the dining table.

The key thing is that you have the right equipment and the ability to communicate with your clients via telephone and email. It is also useful to have enough space to store paperwork and so on properly, as a self employed person will have certain legal requirements in terms of what information they need to retain and have access to. Trading as a contractor through your own limited company has its upside's, most office equipment or goods needed to run your business can be claimable on expenses as is the same with some bills, visit our expenses page for a full run down: Contractor Guide to Expenses

Personal preference is a big factor here. Some contractors are more comfortable, and work better in the familiar environment of an office – and so prefer to work on client site. Others however, are best off working alone and cannot wait to escape the day to day hustle and bustle of an office environment. There are no hard and fast rules either way.

Is it better to work for one client at a time, or many?
Again, this is personal choice. Some people thrive on multi-tasking and some don't. In addition, some jobs naturally lend themselves to this approach. Typically most contractors work for one client at a time and find their contracts through job boards or recruitment agencies. 

How should I charge? And how much?
Generally contractors operate on an hourly or daily rate, based on their skills, knowledge, scarcity of supply/demand of the role, experience and what the market pays. Typically rates vary from £200 per day right through to £2,000 per day and above. For an idea of what different rates of pay for IT contractors are click the link.

Can I keep my day job to start with?
Some contractors opt to start out by freelancing part time. This can be a good low-risk route, but there are some downsides. Often a potential client will not take you seriously and will become frustrated if they cannot get hold of you during normal working hours. Bottom line is, yes it can be done, but there are risks.

What are the disadvantages of Contracting?
There are a few, and only you will know whether these are challenges you can handle. These are some of the most common ones which concern people when thinking about contracting:

  • You will be responsible for finding your own work and making sure that the money keeps coming in (visit job boards and call recruiters to see if your skill sets are in demand).
  • You will be responsible for negotiating your own hourly or day rates, which is something that you may not be familiar with in the early days.
  • Contracting means managing your own finances - for example things like tax, VAT and national insurance contributions - which can be a daunting prospect, however a good accountant will help with most things (visit how to choose an accountant), typically you'll need to set aside 15 - 20 minutes a month to handle your paperwork. 
  • There is less security than you would have as a permanent employee. However, these days there really isn't such a thing as a job for life and arguably some contracts can last longer than many permanent roles.
  • There is no sick pay and no holiday pay, so it’s vital you manage your finances to cover for these times. On the whole contractors do get paid more than permanent members of staff but you'll have to remember to put a little aside to cover such things. 
  • Not having traditional ‘colleagues’ can be lonely if you're used to this environment. There are other things you will have to deal with alone, which is why it is important to build up a good support network of experts around you who can help you to manage all aspects of your business effectively.

What are the advantages of Contracting?
On the more positive side, there are many, many advantages to becoming a Contractor – these are just a few:

Financial

  • An average contractors rate can easily be double that of a full time employee, or even more.
  • Contractors are paid higher rates due to the flexible nature of the relationship and the fact that many projects can be relatively short-term, although this isn't always the case, as some contracts/assignments can last for years.
  • Depending on your individual skills and on the state of the industry in which you work (or the market in general) you can command very high rates of pay.
  • As a contractor, you are paid for every hour that you work, as well as having the opportunity to work extra hours at very good rates.
  • You can work for multiple clients at the same time, on many different projects, which can also increase your pay.
  • If you take professional advice you can generally reduce your tax bill significantly.
  • You can offset all of your business expenses against your income to further reduce your tax bill.

Flexibility

  • As a contractor you are, in effect, your own boss - something which can be very satisfying and extremely enjoyable!
  • You have the ability to be far more independent than permanent employees.
  • You have the freedom to work when you choose, where you choose (depending on available projects of course) and for however long you like.
  • There is a direct link between work effort and reward which sometimes doesn't exist as an employee.
  • Contractors can take as much or as little holiday as they prefer - you sign your own holiday form.
  • The companies you work for are not your employers, but are instead your clients, which puts a whole different flavour on the relationship - and you will be treated more as an equal and less as a member of staff.
  • Contractor projects will give you much more flexibility when it comes to agreeing conditions and terms.
  • As a contractor you also have more flexibility over the payment terms that you negotiate.
  • You have the opportunity to develop your career in a way that suits your personal circumstances at any given time.

Skill development

  • As a contractor you will naturally work for many different companies, and this will help you build up a unique range of skills and experience.
  • Working as a freelancer gives you the opportunity to test out other industry sectors to see if you can widen your experience.
  • A good opportunity to get a really good insight into the different company cultures, processes, operations and structures.
  • Working in many different companies gives you the ability to build up a wide-ranging CV and to establish an extensive list of reference contacts.
  • A good contractor will become known within their own field for their excellent work and you may even find that your services become sought-after, rather than you having to pitch for new projects or contracts all the time.
  • Carrying out project work in different organisations and environments gives you the opportunity to develop existing skills and to learn new ones.
  • As a contractor you will be exposed to many different styles of working, not only in relation to your peers, but also in relation to your clients and your suppliers. This helps you to develop as an individual in more ways than just your core skill set.
  • Contractors often come into new businesses as the ‘industry expert’, which is not only a nice position to be in, it also adds to your credibility as an industry professional and widens your experience further.
  • Working for different organisations gives you the ability to advance your career and knowledge without being limited by a single employer’s processes, procedures or business ethos.

What qualities make a successful Contractor?

  • Know what you want - a successful contractor generally knows what they want to achieve from being in business. Whether it is to achieve a certain lifestyle, or hit a certain financial target within a specified time scale, you need to set objectives to help you measure success.
  • Be comfortable with leadership - someone who feels comfortable in a leadership role will usually make a good contractor, as not only will they be their own boss, they may also have to ‘guide and direct’ their clients as and where appropriate.
  • Be decisive - as your own boss, it will be down to you to make the decisions to ensure your business is a success. Nobody else will ensure important forms are filled in or that clients are chased for overdue payments.
  • Stay self-motivated - with no-one to make you get up in the morning, or stay late to finish a project, it’s very easy to let time scales ‘drift’. In effect, your clients become your bosses and you need to treat them as such.
  • What next? Check job boards and recruiters sites and visit- 'How to contract through your own limited company' for more information. 

We hope the above information has been useful, if you would like any further information please don't hesitate to call 0500 152500 / 01442 275789 or email jaime.thorpe@sjdaccountancy.com.

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.