Tips to change from being an employee to a contractor

Being a contractor may mean higher take home pay, more flexibility and better work life balance. However, to move from permanent employment to a contractor, needs consideration and planning and the decision shouldn’t be taken lightly. With IR35 legislation being tightened by the government, there are key considerations to make before you switch from being an employee to a contractor.

Should I move from permanent employment to contracting?

There are many benefits of being self-employed, contracting or freelancing. The most common question we are asked is ‘Is it better to be employee or contractor?’ Below are just some of the benefits of being a contractor.

• The ability to earn more take home pay.
• Better work-life balance.
• Added experience
• More variety
• More freedom

Read our blog ‘contractor or employee, what’s the best option?’ for more information.

How do I switch from being an employee to a contractor?

Before you decide to switch think about the following things:

• Understand your own reasons for wanting to switch from employment to contracting.
• Research your role and the industry.
• Have a clear plan for transition and beyond.
• Build your networks.
• Test contracting on a small scale if possible.
• Assess the risks around your finances.
• Get organised.

What is better Limited company or umbrella company?

Umbrella Company

Under the umbrella solution you become an employee of the umbrella company and are paid through PAYE. You’ll need to submit timesheets and expense details on a weekly or monthly basis to the umbrella company. The umbrella company will then invoice the end client or the agency and pay you a salary after deducting income tax, national insurance, and their margin for the services.

This solution is ideal for contractors and freelancers who are starting out or planning to work on shorterassignments. It involves less paperwork as the umbrella company takes care of the administration hassleas you are employed by them.

Limited Company

A limited company is your own personal service company that you can incorporate to run your business. To incorporate you need to register the company with Companies House, register for various taxes with HMRC, setup a business bank account and organise insurance cover. The limited company has statutory and financial obligations and is a separate legal entity from you. As a limited company director, you’ll be responsible for submitting all the relevant tax and business documents toHMRC and Companies House.

Running a limited company requires added commitment because of the statutory responsibilities and is suitable for contractors and freelancers who have a contract for more than 6 months and are earning at least £15 per hour.

Use our online tool to help you choose whether to operate under an umbrella company or set up a limited company.

How do I transition from employee to contractor?

If you decide that contracting is right for you then there several things you need to do to make sure the transition from employee to contractor is a smooth one.

1) Establish your IR35 status

When you find a contract and before you sign your contract, you should establish whether the contract is inside or outside of IR35. IR35 rules changed in April 2021 but here are some key factors used by HMRC when establishing whether your contract is outside of IR35 rules.

• Control & direction – prove you have some autonomy in the project and your are not under direct control of your client.
• Personal Service - Is there a requirement for the worker's personal service?
• Mutuality of Obligation - Are there mutual obligations of the contract consistent with employment?
• In business on own account – are you working for your own business?
• Financial risk – are you taking the financial risk?
• Basis of payment – are you being paid a fixed sum for a job, rather than a fixed wage or salary?
• Involvement – if you’re attending regular staff meetings and must request holiday etc then you’ll be classed as an employee.
• Exclusive service – if you’re working on more than one project at a time then that may help you establish, you’re acting as a business.

Read our tips for contracting outside of IR35.

2) Find an accountant

A specialist accountant like dns accountants can help you to set up either a limited company or operate under an umbrella company. They can advise you on HMRC registration, VAT registration, allowable expenses, dividends and salary and tax planning. Ideally you would appoint an accountant prior to signing your first contract.

Here at dns accountants, we’re a specialist in the contracting market, we can fulfil all your tax and accounting needs, offer advice and support on your contracting journey and provide IR35 reviews, specialist contractors packages and help with every step of switching from an employee to a contractor.

3) Decide on umbrella or limited company

Getting paid through an umbrella company can be a stress-free option for people new to contracting. At dns umbrella, we take care of all your umbrella compliance, taxes and make sure you get paid on time.

4) Set up a limited company

Setting up a limited company doesn’t take a long time, but it’s worth using an accountant to set up your limited company and support you with this part of the process. We can help you with limited company formation.

5) Open a business bank account

If you operate a limited company, you will need a business bank account. So make sure you set this up before you start to get paid.

6) Consider VAT registration

Deciding whether to register for VAT or not is a key decision. Businesses can register voluntarily, and whether it is advantageous is a crucial management decision. Businesses must register within 30 days if turnover exceeds £85,000 in the previous 12 months, similarly if turnover’s expected to exceed £85,000 in the following 30 days, the business must notify HMRC within 30 days of the date the threshold is expected to be exceeded. Find out about dns VAT registration & returns service here.

Should I move from employment to contracting?

There is no simple answer to this, you need to consider this on an individual level. Contracting can have some huge benefits but comes with much more responsibilities and worries than employment.

Read our contractor guide for more help and advice.

If you decide contracting is for you, then you need to choose the entity that’s right for you and get help and advice early in the process from a specialist accountant such as dns accountants. In case you have queries or want specialist advice on moving from an employee to contractor, call dns accountants on 03330 886 686, or you can also e-mail us at enquiry@dnsaccountants.co.uk.

About the author

Siddharth Agarwal
I am a Chartered Tax Advisor (OMB) and ACCA. I have 9+ years of experience in owner-managed business taxation issues, company reorganisations, property taxation, and succession planning. I also work with private clients on bespoke tax planning strategies for trusts, residence status, and non-residents. I aim to fulfil my professional duties towards my clients and keep them satisfied, my utmost priority. I believe in establishing and maintaining businesses and personal relationships as the key to mutual growth.