Are you ready to start contracting?

15 May 2023

Chris James - Director of Accountancy Services

Chris James

Director of Accountancy Services

Becoming a contractor is a very big step, so before you start, you will need to think carefully about it to make sure this truly is the right path for you.

Key areas to think about include:

  • What skills do you offer & how much are they worth?
  • Do you have work lined up and how will you source new opportunities?
  • What provision will you need to make for your mortgage and other financial commitments so you don’t need to worry about bills in the early days?
  • If you plan to work from home, have you got a space to work comfortably and in a focused manner?
  • Are you aware of your tax and accountancy responsibilities?

 

Have a backup plan

One way to give yourself the confidence to start is to have a backup plan.

Having options to return to in the unlikely event that your venture doesn’t work out will give you the security you need to step out on your own.

This can include leaving your permanent employment on good terms, building a reliable network of contacts, and continuing to develop your skills.

Your backup plan should also include saving enough money to cover at least three months of your basic living costs. Make sure you take things like tax and insurance into account as well as other outgoings like your insurance or pension contributions. Working this out in advance will help you feel confident you have/can get enough work to generate the income you need to support your lifestyle.

Charging correctly

No matter which sector you’re in, going rates will vary depending on demand and experience so it can be difficult to know what to charge. Before you set your rates, do some calculations by forecasting how much you need to make to fund your lifestyle in comparison to the going rate for your experience and skills.

Consider short-term cashflow

You may also need to consider your personal cashflow. If you invoice your clients near the end of the month, you may not see that money for another 4 – 5 weeks, or longer, depending on your payment terms, so factor that in when making calculations.

Before you set up your business, you will need to decide on a trading structure that works best for you. The right choice will depend on your circumstances and future plans as well as the amount of admin you’re willing to take on. Speak to your Workwell accountant who will be able to advise you.

What structure should you use?

Before you set up your business, you will need to decide on a trading structure that works best for you. The right choice will depend on your circumstances, IR35 status and future plans as well as the amount of admin you’re willing to take on.

If you’re ‘outside’ IR35, you may wish to consider operating as a sole trader or setting up your own limited company.

Limited company

What is it?

A limited company is its own legal entity, separate from its shareholders and directors (even if you are just one person acting as both shareholder and director). Your company will have a separate bank account, its own income and expenditure, can enter into its own contracts, and has to pay its own taxes.

How does payment work?

As a limited company, you pay Corporation Tax on your profits rather than Income Tax and you can pay yourself through a combination of salary and dividends. So it tends to be the most lucrative and profitable way to work. You are also able to claim a wide range of business expenses through your PSC, including equipment, mileage, business trips etc.

Limited company contracting is most suitable for contractors who are deemed ‘outside’ IR35.

Sole Trader

What is it?

A sole trader is a self-employed individual who is the sole owner of their business. It is simple because you can simply start trading, filing a Self-Assessment Tax Return at a later date.

The drawback is that you are not viewed as a separate legal entity to your company, meaning you are responsible for the banking and legal issues of your business and your personal assets can be liable.

How does payment work?

Sole traders pay income tax and self-employed national insurance via the Self-Assessment Tax Return. The amount is based on their profits after expenses. This is straightforward when you’re just starting out.
However, if you reach a certain threshold, you may be better switching to a limited company structure. Note, sole traders aren’t subject to IR35.

How we can help

We have supported thousands of people to successfully make the switch from paid employment to freelancing and contracting. Download our Start Out Strong guide or get in touch to get tailored advice from a member of our team.

SoS Guide Download

 

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