Guide to How Contracting Works

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Contracting in a sector of work you feel passionate about seems like a great idea. You get to choose your own hours, work from home – what could be better? In reality, contracting does not always work that way. As a contractor you are 100% responsible for earning enough money to keep yourself afloat, while seeing to 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 questions you might have.

What is a contractor’s job role?

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; you can get a good idea of your take home pay through a limited company here. Some contractors 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
Graphic of a contract on a clipboard with two signatures

Why do 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.

Jump into contracting

Find out how to maximise your take-home pay and become a successful contractor in our free guide. Also covered in our guide is:

  • Getting started – discover which business structure is best for you and how to get started.
  • Your tax and financial obligations – all you need to know about your paying tax, filing accounts and what costs you can offset.
  • Making your business a success – learn how to grow your business, how to market yourself and to forecast for the future.

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.

A key factor 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 properly; as a self-employed person, you will have certain legal requirements in terms of what information you need to retain and have access to. Trading as a contractor through your own limited company has its advantages; most office equipment or goods needed to run your business can be claimable on expenses – as is the same with some bills. Our expenses guide has a full rundown of what you are eligible to claim.

Personal preference is a big factor in whether you work from an office or on site at a client. Some contractors are more comfortable and work better in the familiar environment of an office – and so prefer to work on the clients 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 a 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 do contractors get paid?

Contractors generally operate on an hourly or daily rate. These rates are based on their skills, knowledge, the scarcity of supply/demand of the role, their experience and what the market pays. Typically rates vary from £200 per day right through to £2,000 per day and above.

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. You run the risk that a potential client may not take you seriously, or 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 disadvantages that 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. Financial aspects like tax, VAT and national insurance contributions can be a daunting prospect. A good accountant will help with most of these things, but 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 events. 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 any shortfalls.
  • 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.
  • Depending on your working practices, HMRC could deem you inside IR35 which would remove some of the tax benefits of working through a limited company. You can find more about working inside IR35 here.

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 full-time 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. This lends a different dynamic to the relationship in that 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.

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We hope the above information has been useful, if you would like any further information please don’t hesitate to call us on the number below:

Skills 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. 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.
Computer screen with arrow showing how you can maximise your income

  • 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 makes a contractor successful?

  • 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 your 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.

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