What to consider before becoming an IT contractor

Kira O'Sullivan
07 September 2020
6 minute read

According to the ONS, 14.5% of working people in the UK are self-employed, so if you’re thinking of making the change from employee to freelance contractor, you’re certainly not alone. And although demand for IT contractors has fallen over the course of this year, this doesn’t necessarily mean that roles won’t become available in the near future.

Moreover, the digital transformation that many businesses have been forced to rapidly undertake due to the increase in remote working may well lead to even greater demand for IT roles, particularly for those in short supply, such as system administrators, IT managers and IT security specialists.

Limited company or umbrella company?

One of the first things to think about is whether you’d like to work through your own limited company, or through an umbrella company, which is a little like a midway between working for an employer and as a totally independent contractor.

Contracting through an umbrella company

Operating through an umbrella company means you cannot take advantage of the tax benefits offered when working directly through your limited company, as you’ll be paid via the umbrella company, as an employee of that company.

However, it comes with some advantages. For example, if you’re not a fan of paperwork, an umbrella company may be the right choice for you, as it’ll take care of the administrative parts of contract work, such as deducting tax and National Insurance contributions, so that you don’t need to worry about it. Some umbrella companies offer more than just administrative support and can offer benefits you’d expect when working for an employer, such as holiday pay and sick leave.

Contracting through your own limited company

Operating through your own limited company gives you complete control over your business finances. You’ll be able to use your income to be as tax efficient as possible, by making use of dividends, VAT and expenses.

Agency or independent?

Agencies are essentially recruiters, so, much like a recruiter for permanent roles, they’ll typically want to meet you to find out exactly what you’re looking for and whether you’re a good fit for the contracts they have access to.

There are two key reasons to sign on with an agency. Firstly, finding work as a contractor can be tough. Applications take time to complete and interviews (for most of us) are somewhat stressful. Not to mention the uncertainty of not knowing when your next pay cheque will come through.

Secondly, many businesses that hire contractors prefer to hire through agencies. Being on the candidate side takes time and effort, but it’s a two-way process, and many businesses - larger ones in particular - prefer to leave the arduous task of shortlisting contractors to agencies.

Deciding whether to find work through an agency, or completely independently is a personal decision, but it’s fairly common for contractors to start out with support from an agency and to no longer need as much help finding contracts once they've built up a network of clients and industry contacts.

IT contractor

Negotiating contracts

Negotiating a contract can be daunting. The good news is, that as a contractor, it’s something you’ll have to practice more often than you would do as a permanent employee - and practice helps with confidence.

Knowing how much to charge is pretty straightforward. There’s a market rate for every job - Glassdoor's Know Your Worth tool can help you with this - and then, on top of this, you may want to take into consideration the client's industry, the location of the business, and the overall job market. Contractorcalculator.co.uk has a great tool to give you an idea what you may like to charge as a contractor - and includes figures for both inside and outside IR35 contracts, as this can make a big difference to your take home pay.

IR35 and paying tax on contracts

However, one thing to bear in mind when switching to contract work is IR35, which as a result of the off-payroll update, which is to come into effect for the private sector in April 2021, may make contracting less lucrative and contracts difficult to come by for those operating through a limited company.

The off-payroll update already applies to contracts for companies within the public sector, but will apply to the private sector too, from 6 April 2021. This will mean that each contract you take on will have to be assessed by the client to determine whether the contract is ‘inside IR35’ and therefore subject to Pay-As-You-Earn tax (PAYE) and National Insurance Contributions (NIC), or ‘outside IR35’.

This has had seriously negative consequences for self-employed professionals, as outlined by smallbusiness.co.uk, as the rules have proven difficult to understand and have also led to businesses reducing their dependence on contractors.

Proactive networking

Networking is arguably the greatest way to expand your opportunities as a contractor. Before COVID-19, Meetups and conferences were a great way to meet people in your field and prospective clients. However, the IT industry has adapted well to remote work, which means that there’s still a wealth of virtual networking opportunities. Eventbrite, which has created a section dedicated to advertising online events - many of which are free - is a great place to start.

Preparing to make the move

If you’re ready to start offering your skills as a contractor, there are a few things you can do to make the move as smooth as possible:

  • Polish your CV and/or portfolio. When setting out as a contractor, keeping a record of your project track record is super important - both for clients and for your own reference, as it’s easy to forget details when moving from project to project in a relatively short period of time.
  • Start your first contract alongside your job. If possible, and not prohibited by your employment contract, you may want to consider dabbling in contracting while still in a permanent role. This will give you some idea of whether a complete move will suit you and will offer some stability in terms of income.
  • Save. There’s no doubt about it: contract work is less stable than permanent work. You generally don’t get paid time off, sick leave (though some umbrella companies do provide these benefits), or notice periods. For this reason, it’s more important than ever to think about saving a ‘cash cushion’ to tide you over during leaner times.
  • Speak to an agency. Once your CV is up-to-date, it can be helpful to talk to agencies in your respective field, to get on their radar and understand what’s out there.
  • Get networking. Networking with potential clients and peers in your field - both permanent employees and other contractors is priceless. They’re a great source of potential work.

Insurance for contractors

Working independently means dealing with your own business insurance. If you opt to work through an umbrella company, some level of basic business insurance, such as employers liability, professional indemnity, public liability will typically be extended to you.

If you’re working through your own limited company, however, insurance will be your responsibility to arrange. Though it's not a legal requirement, clients will often insist that a contractor has professional indemnity cover, at a minimum. This particular insurance offers protection for contract disputes, among other issues in relation to the services you provide. You may also consider commercial legal protection, which gives you access to legal expertise to cover commercial legal matters, including IR35 and tax enquiries.

To sum things up, the relative freedom offered by choosing to work on shorter term projects, versus traditional employment, can be liberating. It has the potential to give you more control over your work hours, the flexibility to pursue things you otherwise wouldn’t have time for in a traditional longer term full-time role, but it does require more planning on your part and doesn’t suit everyone.

And even if you find that it’s not for you, you can always go back to a permanent roll.

Share this article

We've made buying insurance simple. Get started.

Related posts