If you’re thinking of contracting, either for a few months or as a career, there are a few things to decide before you take the plunge. In our contractor services section, you’ll find out more about umbrella companies, forming your own limited company, what insurance you need and where to find a good contractor accountant.
How do I get paid?
There are three common ways of getting paid as a contractor:
- The client employs you directly on a fixed term contract and pays you on the same day as the rest of the workforce at your agreed rate. This is the most straightforward arrangement for contractors but some employers may not want to take on the payroll admin.
- You join an umbrella company who become your legal employer even though you are working at the client’s site. You submit timesheets and get paid weekly or monthly. The main benefit of an umbrella company is that you can legitimately offset your business expenses eg mileage to interviews, software and hardware against your taxable pay which results in an uplift to your take home pay. Ideal if you only anticipate contracting for less than two years.
- You set up your own limited company and invoice the agency or end client yourself. You’ll probably need to appoint an accountant and will be responsible for your own tax and vat returns, plus submitting end of year accounts. In return, you’ll benefit from working very tax efficiently. You may need to check that any contract you sign, plus the actual working arrangements you have on any given contract, allow for this, as in certain cases the tax man may not be happy with this way of working.
You’ll find further useful resources at www.contractorcalculator.co.uk or www.contractoruk.com
What is an umbrella company?
An umbrella company provides a way for contractors to get paid rather than their client payrolling them directly or the contractor having to set up their own limited company. You are legally employed by the umbrella company and can then offset your business expenses, such as mileage, against your taxable pay.
This means you end up with more take home pay than if you were paid on the company’s payroll.
Why would I choose to get paid via an umbrella company?
Generally, you’ll benefit financially if you are earning less than £35-£40k p.a. If you earn more than this and aren’t allergic to paperwork, you’ll probably be better off forming your own limited company. Umbrella companies are great if you only want to contract for a short time (anything less than two years) and also remove any worries about calculating your own tax or having to do any accounts.
How do I choose an umbrella company?
There are dozens of umbrella companies in the UK and the only difference between them is the fee they charge and their customer service. Beware any company making claims about guaranteed take home pay percentages (this isn’t something they can guarantee) or encouraging you to claim expenses you haven’t actually incurred (it’ll be your neck on the block if HMRC investigates.) At KDR Recruitment, we aren’t affiliated to any one umbrella company and don’t accept payments from them in return for referrals. We recommend you look for companies that are accredited by FCSA or Professional Passport, read contractor forums or ask colleagues for recommendations. If you use a comparison website, make sure it’s not owned by an umbrella company as the reviews may be a tad biased!
I’ve chosen an umbrella company – what next?
If you’ve decided that you want to contract via an umbrella company, just let us know so that we can make the necessary contractual arrangements with them. This can take a few days or a couple of weeks so try to give us as much notice as possible before your contract is due to start.
Thinking about working for yourself?
If you decide that the best route for you is to open and run your own limited company you have the choice whether to do it yourself directly with Companies House or you can pay a bit extra and ask a company formations specialist to do it for you.
Follow the link to a quick and easy way to set up a service company.
Your accountant may be able to help as well and may have a preferred route to get set up.
Do you need insurance cover?
As a professional IT Contractor and if you operate through your own limited company, you will need to have adequate insurance cover in place to protect yourself against possible action by your clients. As a minimum legal stipulation you will need employer’s and third party liability insurance. It is also a prerequisite of being a KDR contractor that you are protected under a suitable professional indemnity policy.
There are loads of business insurance sites on the web but we found the following that may save you some time:
If you are running your own limited company you will need the services of a reputable firm of accountants to help guide you through the minefields of corporation tax returns, VAT, annual accounts and PAYE.
You may know a local accountant you want to work with or choose a contractor specialist. You can find a list of firms who understand the ins and outs of contracting here.
KDR receives no incentive from any of the sites concerned in this blog post, and cannot be held responsible in any way for any dealings you may have with them or their recommended accountants.
Are you an experienced contractor? What advice would you have for those starting a career in IT contracting?