5 things to consider before becoming a contractor

For many people, leaving employment and becoming self employed as a contractor, can be seen as providing a much better life, with freedom, flexibility, ability to earn more money and obtain a better work-life balance.

However, before becoming a contractor, there are many things that you need to consider as contracting not only has some great benefits but also some risks attached to it. You need to consider the financial cost, your business structure, and the loss of benefits you may get as a permanent employee.

To help you make this decision, weve detailed below just some of the things you need to consider before becoming a contractor.

1. What are the financial implications?

One of the big draws for many people to consider running their own contracting business is the potential to earn more money and the one question were always asked is "Will I earn more money as a contractor?". For many people the answer is yes, with many contractors, especially in industries such as IT, they can command double the day rate that they could earn on a basic salary as a full time employee. People believe that contracting will help them to achieve a significant pay increase. There is no doubt, that done properly, self employed as a contractor can be much more tax efficient than permanent employees with the ability to pay themselves via a combination of salary and dividends. With the right kind of advice from accountants such as dns accountants, you could potentially decrease the amount of tax you pay. Using an umbrella company or becoming a limited company can also save you on tax making contracting more profitable. (See our page here about choosing between an umbrella or limited company)

However, before making the leap to contracting and assuming you will earn more money, you need to sit down and realistically do your numbers and give the transition some serious thought. You need to look at both the financial cost of setting up in business and running the business, alongside things that you will lose such as a permanent salary and employee benefit packages, including paid holiday entitlement, employer pension contributions and medical cover etc.

Cost wise things to consider are:

• Cost of setting up a business structure (if you are going to operate as a limited company).
• Cost of workable space (office costs, storage costs).
• Cost of equipment (IT equipment, mobile, tools, car/van).
• Cost of insurances (things like indemnity insurance, public liability insurance).
• Cost of having to have your own pension plan and/or other benefits such as life cover.
• Cost of fees such as accountancy fees.
• Cost of travel expenses if you are travelling to different places of work.

Other financial implications depend on how you set up as a contractor and what your current employment status is and the pay and benefits associated with permanent employment.

Other financial areas to consider:

• Loss of benefits such as company pension scheme, private health care, paid holidays.
• You will not be taxed each month, but will need to put money aside from your money each month towards your tax bill. If you dont then you may face a substantial tax bill at the end of the year.
• Any time off you take for sick leave or holiday, you will not be paid for and will need additional funds to cover these time.
• You may not obtain contracts for the whole of the year, so will have to budget for times where you may not have any work.
• You will need to have money on one side personally when you first go contracting and in your company later on as a financial safety net for periods when you may not have work but you have to cover additional outgoings.

Employ a contractor specialist accountant, like dns accountants to help you with set up and running the financials for you. This way youll get the best set up and financial advice to help you to earn more money through careful tax planning and cost control.

2. How will the change affect your lifestyle?

A hugely important area when considering if you are considering becoming a contractor is the effect it will have on your family or an individuals lifestyle. Often contractors consider all the financial implications above but not the wider area of lifestyle, particularly if you have family or your contract role will mean you will be working from home.

Some contracting roles might be further away than your current job, they may entail you living away from home and there will be a financial cost and an impact on your family and home life of this.

Not having the security of permanent positions and the salary attached to a permanent role, may place additional stress on you and your family. For some people the thought of not having a permanent role and guaranteed salary package can be scary.

Most people like the predictability of knowing what money they will earn each month. Financial commitments will put pressure on most people to earn consistently. So you will need to have some money behind you to ride out a period of months where you may not have work, and therefore income. If you dont have this money or are uncomfortable with the unpredictability, then contracting may not for you.

3. Do you have the right mentality?

From the moment you consider contracting, you need to consider your motivations for making the switch from permanent employment.

If you like the thought of a variety of jobs and roles, want to gain wider experience, are excited about running your own business, enjoy a challenge, are willing to take the risks and are self-motivated then contracting may be for you!

4. Will you set up as a sole trader, limited company or use an umbrella company?

There are a range of choices of how you set up and run as a contractor, these include being a sole trader, limited company or setting up an umbrella company. There are differences in each structure, particularly when it comes to tax issues.

As a contractor, you will be saying goodbye to a lot of benefits that come with being a permanent employee. However, using an umbrella company can help. For a fee, umbrella companies handle things such as tax, pensions and holiday entitlements. You could also choose to set up as a limited company and manage this yourself. This will allow you to take home more money, but you will be responsible for the admin side of contracting.

5. How will you find potential clients and contracts?

One of the big things about being a contractor instead of an employee is where your future work, new clients and contracts will come from.

There are various ways a contractor can get new work and contracts including:

• Sign up with an agency

  In order to maximise your chances of securing contracts that are right for you, you can register with multiple recruitment agencies, letting them know you would like to take on contract roles. By registering with a few agencies, you can build a solid working relationship with agencies who get to know your skills.

• Sign up with various contractor job boards

  Lots of employers advertise online, so these should be the first point of call, and will help you scope out the market.

• Networking & referrals

  By building strong relationships within your industry, you’re more likely to build your credibility to the point that clients will begin to refer you to others. Referrals are a great method of getting reliable and consistent work, providing you’ve spent enough time developing your network.

• Digital marketing

  Building your online digital profile may be important in your industry for prospective clients to find you and check you out. Things like your website, advertising and social media platforms help ensure you’re visible online.

• Getting larger contracts

  If you are industries like the IT or construction sector, then you may consider tendering for public sector and large corporation contracts. Its worth looking at the contracts finder website where you can find national and local government contracts. There are also other sites that provide a search function to find contract work.

Summary

Contracting can be a great opportunity for you to take control of your career, earn more money and get a wider variety of work and experience. For many people, it’s the best decision they’ll ever make and can often lead to a complete lifestyle change.

However, leaving a permanent role doesn’t come without risks and can be daunting. Planning carefully, ensuring you have the funds to begin contracting if roles arent always forthcoming and being aware of the pros and cons of contracting before you jump in is advisable.

If you need help or advice on setting up as a contractor, limited company, umbrella company or advice on the financial implications, tax returns and other tax considerations of contracting, then call our team on 03300 886 686, or email on enquiry@dnsaccountants.co.uk.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.