So, You’ve Decided to Become a Contractor – Now What?

Having worked in many areas of recruitment, in my experience, ServiceNow is the area that has seen the most permanent Consultants become contractors to seek more lucrative rates. For those thinking about taking the leap into contracting I have created this comprehensive guide to make the transition a litter easier.

1. Do you have enough experience?

Before you take the leap of faith and resign for greener pastures, research contract roles in your area of experience.

· Does your experience match that being described in adverts?

· How many opportunities are out there?

· Do you know contractors? Ask their opinion!

· Talk to a recruiter for advice – find an industry expert who recruits contract roles and get their honest opinion. (Me!)

2. What comes first, the contract or the resignation?

Companies usually require contractors because they need a highly skilled resource in a shorter time than it would take to employ a permanent employee. Therefore, notice periods can have a negative impact on applications for contract roles:

· If you have a 4 week notice and are prepared to start immediately after leaving your permanent job it is possible to find your first contract before handing in your resignation.

· If your notice period is longer than 4 weeks, you may find that you need to hand in your resignation before finding a contract – if you have completed step one, you should be confident that you will be able to find a role.

3. Being Self Employed

So, you’ve handed in your notice and are now on the journey to becoming a contractor which in turn means becoming self-employed and looking after your own tax etc. There are a few options to consider, I will list all the options with the advantages, disadvantages and my recommendations:

· Umbrella Company: An umbrella company will act as an intermediary between yourself and the client that you are working for (whether that is the agency or the company you are on site with – I will get to that later) they will manage all of the administration that comes with being self-employed such as: payroll, tax and invoice administration. They will deduct tax and national insurance and pay you the rest. This is a good option if you would like to dip your toe into the contracting world and decide whether it is for you without having to register as self-employed or set up your own company.

o Advantages:

§ Time saving

o Disadvantages

§ Longer wait for payment

§ Pay tax as PAYE rather than business owner which will cost more

§ No direct relationship with the employer with regards to invoicing and pay

§ Pay a fee to the umbrella company

· Sole Trader: Registering yourself as a self-employed individual, you will have a contract direct with any employer or agency depending on how you secure your contract and will invoice every month for your fees. Tax is paid at the end of every tax year in one payment.

o Advantages

§ Keep all profits

§ Start up costs are low

§ Easy to wind up the business if you want to become a permanent employee again

o Disadvantages

§ You have liability for all business debts

§ No distinction between private and business assets

§ You Are responsible for all day to day business decisions

§ You are taxed as a single person

· Limited Company – Registering a new company with yourself as the Director and employee of the business. Contracts will be between your Limited Company and the employer or agency depending on how you secure your contract. I would recommend this to be the best option.

o Advantages:

§ Tax advantages – only taxed on profits (usually at a rate of 21%) and therefore not subject to the higher rate of tax

§ Keep ownership and control over how the business is run

§ You have the ability to grow into a business in the future with more employees if you wish

§ Low set up costs

o Disadvantages

§ More complex accounts

4. Setting up a Limited Company

Should you wish to go down the limited company route there are several steps that you need to undertake:

4.1 Find an Accountant

· Choosing the right Accountant will be one of the most important decisions you will make. They can make running a limited company effortless and help you maximise tax savings.

· All accountancy firms provide a free consultation, book an appointment with at least 3 local Accountants, ask lots of questions, get a full list of fees and choose the firm you feel will provide the best service.

4.2 Choose a Company Name

· You need to choose a company name which you will register with Companies House. You can go for something simple and use your initials. If you think you may want to operate as a bigger business in the future and have employees you will need to choose a more considered company name, something that reflects the industry that you work in.

· You cannot register a company name that has already been registered with Companies House. You can check if the name you have chosen is registered here:

4.3 Register Your Company, Employer and VAT Registration

· Once you have chosen a name and checked that it is not already registered you need to register your company with Companies House, register as an employer and if you will earn more than £83,000 you will also need to register to pay VAT.

· You can ask your Accountant to do this (a fee will be charged), there are online companies that will set the company up for you (for a lower fee) or you can register the company yourself for £12 here:

· If you chose to register yourself, once you have the certificate of incorporation you need to register the company as an employer here:

· Register for VAT here:

· If in any doubt, ask your Accountant for help and advice.

5. Set Up a Bank Account

Once you have registered your company you will need to set up a bank account in the company name. This will be the account all invoices generated from contracts will be paid into.

· Think about where you will work, if you want to take contracts internationally, find an account that provides favourable rates when having multiple currencies being paid in.

6. Insurance

You will need to invest in the following insurance products:

· Public Liability Insurance – to protect you in case of accidental damage to a clients property

· Professional Indemnity Insurance – an important cover for businesses that give advice or provide a professional service to clients. It can pay for compensation claims and legal fees that may arise if a client suffers a financial or professional loss due to negligence in your work

7. You’re Ready to Take a Contract

The above steps may seem daunting and time consuming but you can have everything set up within a week.

· If you haven’t secured a contract yet, start applying. You may wish to be less selective with your first contract and offer a slightly lower rate to guarantee that you secure work before the end of your notice period.

8. The Contract

Once you secure a Contract role you will receive a Contract for services from your client. Of course, you should read the whole contract but there are several points you need to take note of particularly

· If you are working direct with the client the contract will be between your limited company and the client. If you secure your role through an agency, the contract will be between your limited company and the agency. The agency will have a separate contract between themselves and the client you will be working for.

· If the contract is through an agency make sure you opt out of agency regulations – opting into these will result in you being treated the same as a permanent employee after 13 weeks in respect to salary, holiday pay and pensions.

· Check the first page of the contract to ensure the limited company details are correct

· Check the schedule:

o To determine what payment terms are being proposed

§ Payment terms determine the period you have to wait between sending an invoice and being paid – sometimes this can be negotiated.

o The start and end date

o The rate

· Check the notice period

o Each client will have different notice periods that you must give to leave the contract and the client must give you to terminate the contract – again sometimes this may be negotiated

· If you do not know the meaning of a term, call the client/agency and ask!

CONGRATULATIONS!! You have successfully made the transition from a permanent employee to a contractor.

If you have any questions please do not hesitate to get in touch via LinkedIn, email: or call: 07880496714