I stayed with permanent roles up to the age of 29, even though I knew contract draughtsmen were earning considerably more. I was young and trying to get on the property ladder and that made me feel a contract role was too risky and that a steady income and job security was more of a priority.
A change of relocation in 2002 allowed me to dip my toe into the contracting pond. My first contract was for only 3 months but ended up lasting 9 months. I really enjoyed the flexibility that contracting had to offer and decided this was the route I would now take.
When you first start contracting you will need to decide whether to find an umbrella company, the easiest option by far, or start up a limited company. With umbrella companies you become an employee of theirs. The client who you work for pays the umbrella company once you have submitted your weekly or monthly timesheets. The umbrella company pays you a salary after the deductions for national insurance, tax, expenses and their fees; plus taking care of all administration. It really is a very hassle free way to do contracting.
If you enjoy contracting and decide to pursue it long term then having a limited company would be the next logical step. Starting a limited company is the most tax-efficient way to operate. Unlike being an umbrella company employee, you now pay yourself in the form of a basic salary (usually low) and the remainder is drawn as dividends. These dividends are not subject to National Insurance contributions, which results in tax savings. Unfortunately this benefit was considerably reduced in April 2016 following a revamp of dividend tax rates.
You will need to register a company name on the Companies House website and you will also need to recruit an accountant. I have a chartered accountant but really any accountant with a decent reputation will be fine. Your accounts should be pretty straightforward with no problems.
Another decision to make is whether you want to sign up to the VAT Flat Rate Scheme. The idea being you can add 20% VAT to your invoice but only pay back 16.5% to HMRC every quarter. This means you get to keep 3.5% of the sales as surplus. When the rate was 14.5% this was a nice way to make a little bit of money throughout the year but now they have changed the rate to 16.5% it’s really not worth the hassle.
When you decide to go down the contracting route you will be working through an agency. Recruitment agencies work for companies directly to help fill their roles although occasionally you can work directly, but most companies prefer you to work through an agent as this takes away a lot of hassle and paperwork for them.
When I look for a new contract I would go on indeed.co.uk which is my preferred job recruitment website. You can go into the advanced job search section of this site and narrow down the most suitable roles. After applying for a role, and assuming you are suitable, the agency will contact you for a discussion and if agreed put your CV forward to the company. If you get the role then the agency will draw up a contract for you to sign which will state the job description, location, hourly rate and terms and conditions. This is a legally binding contract so read it thoroughly before signing.
I formed Teratek Ltd in 2007 and haven’t regretted the decision and I have been fortunate in finding work and building up a good network of contacts. My advice to any new contractor starting out, especially if they are getting a limited company, is to take short term contracts.
You will also need to know about IR35 and the agent will be able to advise you more on this.
This webpage explains IR35 in more detail:
Even though you’re the only employee of the company you need to operate like a limited company would. This includes investing in your own computer hardware and software, getting a website and advertising your services. Pay for training courses out of the business account and take on smaller projects, even if it’s just a few CAD drawings at a time.
PeoplePerHour is a good website for smaller projects. Nothing will please HMRC more than lots of invoices from numerous companies in your accounts.
If you can find a contract on a good rate with plenty of hours, then make hay while the sun shines, but it’s still important to seek smaller projects elsewhere. This will build up your CV and get you a decent reputation. Contracting can provide a good income, but never forget you have an accountant to pay for, no sickness or holiday pay, zero pension contributions from the employer and no job security at all. You need to maintain very good bookkeeping skills and save for corporation, income and dividend tax bills.
It is important to get some decent savings behind you as it soon gets frittered away when you are out of work. This can happen pretty quickly as you are normally on a weeks’ notice. There are obvious pros and cons to contracting but I like being self-employed and enjoy the freedom to pick and choose the work I do. Being your own boss can be hard work at times but the rewards will come once you have obtained a good reputation.
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