Flexible monthly business insurance
- Getting the basics sorted
- Avoiding late payments
- The 5 biggest risks facing app and software developers
- What every contractor needs to know about business insurance
If you’re an IT contractor, you’re part of one of the fastest growing tribes in the UK. There are currently nearly 2m contract and freelance workers across the country; that’s 6 per cent of the workforce, contributing a whopping £100bn to the economy(#_ftn1).
IT contracting holds plenty of attractions, not least the freedom to choose your jobs, have flexibility over your hours and location, as well as command a higher salary than you would in permanent employment. This, combined with the variety and greater control it gives you over your work-life balance, means that for many it’s the perfect lifestyle.
On the flipside, as a contractor you do miss out on certain benefits that come from being an employee, such as paid holiday, a pension and guaranteed pay cheque at the end of the month. Being self-employed also exposes you to certain risks that you wouldn’t face as a traditional employee, including responsibility for any damage or legal claims that arise.
All these factors mean that it pays to be prepared. So, whether you’re an established IT contractor, or thinking of giving it a go, this guide covers off everything you need to know to make a success of it.
Getting the basics sorted
Contracting requires you to get a few admin bits sorted, to ensure you’re working above board, that your clients can pay you (very important!) and that you’re fulfilling all your responsibilities to Her Majesty's Government. Here’s some of the key points tobe aware of:
Limited company or umbrella company?
This is one of the first decisions you’ll need to make and both options have advantages and disadvantages. With a limited company, you’re effectively setting up a separate business for your services, from which you will then invoice your clients at the end of every month or project. The popularity of this option mainly comes down to its tax efficiency, as you’ll pay corporation tax and take dividends, rather than paying income tax on earnings. On the downside, running a limited company involves a bit more paperwork, including annual company filings, which means you’re likely to need an accountant to help you.
The alternative is to get paid through an umbrella company, whereby a third-party agent acts as your employer, organising all your income tax and National Insurance contributions for you, so you get a pay cheque as usual at the end of the month. The benefit of this is that you won’t have to deal with any paperwork and it can be a good option for those starting out and/or with lower earnings. However, higher earning contractors are likely to find the extra admin of a limited company or self-employed status worth it for the tax savings. An umbrella company will also take commission so that’s something to bear in mind too.
Managing invoicing and accounts
If you’re going the limited company route, a professional invoicing system will make billing your clients easy and efficient, while simultaneously giving you away to manage your business accounts. You could use Microsoft Word and Excel for this in the early days while you get set up, but you’re likely to benefit from accounting software, such as KashFlow or FreeAgent, particularly once you become more established and your accounts become more complex. You should also look into setting up a business bank account, which will help you to manage your business income and outgoings ready for your tax return. A good option is Coconut, the new bank for freelancers, which has loads of features to help you manage your money better.
How much to charge?
Most contractors charge by the hour or the day, which can make it difficult to know how much to charge when you first start contracting - if you’re used to earning an annual salary. It can be tempting to set your rate too low in the early days to get a foot in the door and win business. Some employers and agencies might try to take advantage of your lack of experience to get a good deal, so it pays to do your research.
When deciding on your rate, you can start by looking at what other similar contractors are charging, while also considering how much you want to earn over the course of a year and work backwards. Always remember that you need to allow for holidays and time off sick – which, as a contractor, won’t be paid – as well as the fact that you won’t receive any benefits, like health insurance and a pension.
You’re likely to find that IT contractors can command a higher salary in certain industries, for example financial services, so bear that in mind when looking for jobs. And if you’re not sure, a good strategy is to ensure that you don’t commit to a long contract straight off the bat – maximum six months – in case you later find you’re undercharging.
Agency vs direct to client
The traditional route to finding contract projects is to sign up with a specialist recruitment agency that has relationships with various large employers. A knowledgeable and well-connected recruiter will then send your CV to any relevant openings and offer you the pick of the available jobs at any one time. They can also take away the headache of negotiations, by having these discussions on your behalf.
However, there are more and more opportunities to go for jobs directly, via online jobs boards like Indeed or ContractSpy, as well as dedicated platforms at some of the large employers, such as GigNow at the consultancy firm, EY. The benefits of this are that there are no agency fees involved so you can command a higher rate, while also having the chance to build a direct and potentially longer-term relationship with the company.
Working as a limited company, you might feel like Christmas has come early when you receive your first invoice payment, but remember, as a self-employed individual, your tax won’t be deducted immediately. Instead, sole traders and limited companies get to pay theirs a bit later in the year, in one lump sum. So, rather than going on a shopping spree, remember to hold between a third and a fifth of it back, as well as putting some away to cover any gaps you might have between jobs.
It may sound dull – and it is! But it’s important to know about IR35 as it can catch contractors unawares. For those not in the know, IR35 is the short name used for the ‘intermediaries legislation’ - a set of tax rules that apply if you work for a client through an intermediary, whether that’s a limited company or an ‘umbrella’. It will only apply to you if you are treated much the same as a normal employee, despite being an external supplier and was introduced to avoid what is known as ‘disguised employment’, whereby a contractor can avoid National Insurance and pay lower income tax, by being paid through an intermediary rather than the employer’s payroll. So, if you’re planning to take on longer contracts working within a client’s business, it’s worth finding out more about it.
Avoiding late payments
Late payments are the bane of many contractors, and they can be a sensitive subject to deal with. To avoid the trauma of tardy clients, here’s a few tips:
Get all agreements in writing: Most clients are totally trustworthy and wouldn’t dream of doing a runner without paying for your hard work, but that doesn’t mean you shouldn’t take precautions. So, even if you don’t have a formal contract in place, make sure that you have agreed in writing the activity, deliverables, how much you are charging, payment terms and any late payment fees* before you start work. That way, if there are any disagreements down the line, you have something to fall back on.
All companies have the right to charge interest on a late payment under the Late Payment Debts(Interest) Act 1998 and more recently the EU Late Payment Directive 2013. While this isn’t advisable for every client who pays a few days late, it’s an option where late payment is persistently occurring, as a means of covering your costs and inconvenience.
Keep a record: It’s always best to keep track of any correspondence with the client, firstly to ensure clarity on what’s been agreed and secondly, so you have credible evidence if you need to take legal action later on. If you agree something in person or over the phone, ask for email confirmation of everything that was discussed, or provide it yourself for the client to approve.
Invoicing tips: Invoicing on a consistent and timely basis will help reduce the risk of late payments. Check with your client when is the best time for them, based on their own payment schedules and, for those customers you’re concerned about, ask whether invoicing more regularly will help. An accounting system or invoicing app such as Albert, which is free and easy-to-use, will save you time when raising invoices, while also alerting you promptly to any late payments. Remember, the quicker you send them, the quicker you’ll get paid, leaving you more time to do what you love!
Dealing with late payments
While improved admin and processes will reduce the amount of late payments you receive, it’s inevitable that it will happen every now and again. When it does, it’s important to broach the situation sensitively to prevent damaging your valuable client relationships. Then after 30 days of non-payment, here are some simple steps you can take:
- Stay visible: Don’t be afraid to send a friendly email reminding your client of the outstanding fee that needs to be paid.
- Pick up the phone: If the client is still not responding, call them. It’s much harder to say “no” on the phone and you’re more likely to get an answer as to why they haven’t paid yet.
- Stop working: Put all further work on hold until you receive payment.
- Consider a payment scheme: This may be a helpful option if your client is struggling to pay because they simply cannot afford it.
- Take legal action: This should be the last possible resort. If the client continues to ignore your requests, you can take the dispute to a small claims court.
The 5 biggest risks facing app and software developers
As two of the most dynamic and innovative industries of the moment, app and software development roles are increasingly sought-after amongst IT contractors. Research by AppAnnie found that worldwide app downloads were up 15% year-on-year in 2016, while the revenue paid to developers increased by a staggering 40%.
If you’ve got the skills, there is no better time to be working on app or software development projects, with plenty of demand from clients keen to deliver new customer experiences. Just make sure you’re aware of the possible risks involved, and how you can cover your back:
Breach of contract: Software and app development can be notoriously unpredictable. You’re never sure how long a project is going to take, or what obstacles you’re going to come across during the process. But, if you’ve agreed something in a client contract that you’re not able to deliver on, or they’re not happy with the final product, as a contractor you could be held responsible for any financial losses that result. Your best strategy is to make sure you have a watertight contract, drawn up by a specialist lawyer, while also investing in professional indemnity insurance (PI), to cover any legal costs, fines and financial losses, if you do face a claim.
Intellectual Property (IP) or copyright infringement: There are two sides to this issue; protecting your own IP -or that of your client - while also making sure you don’t infringe on somebody else’s. Everything from source codes to designs, name, logo and any written content, can be covered by IP. Clients are likely to ask you to sign an NDA (non-disclosure agreement) before starting work to ensure their sensitive information and ideas don’t get out – and give them recourse to take action if they do. It is also likely that they have trademarked, copyrighted or patented their IP to protect it by law. When using the IP of others as part of your work, make sure you or your client has licenses to do so, or you could be facing a claim. Again, PI will cover your back if you do miss anything as part of your work.
Data breach: If you build an app or software that collects user data, such as names, email addresses, dates of birth, or telephone numbers, then you could be held responsible if it turns out to have security failings. That means it must comply with data protection laws, both in the UK and any other market where the app will be available, and your client could face fines of up to £500,000 for non-compliance. You can find out more about the General Data Protection Regulation at the Information Commissioners Office. You should also consider cyber liability insurance, which will cover your legal fees, fines (where insurable by law) and any other expenses, in the event of a data disaster.
Defamation: This is the act of damaging an individual or company’s reputation through libel or slander. While your own work is unlikely to do this (although make sure it doesn’t!), you could be stung if your app or software allows user-added content, in which case you could be liable for any defamatory, infringing or unlawful content that is posted by others. You – and your clients - have three options in this situation: you can leave all content unmoderated; you can moderate the content before it appears; or you can moderate it after it appears. The majority of businesses go for the latter option as it means you’re not liable for anything defamatory. But whichever you choose, you need to have a takedown policy in place, and again, professional indemnity can ensure you’re protected for any oversights.
Cyber attacks: Cyber criminals are becoming more commonplace and sophisticated all the time. Not only are your own systems, files and data at risk, but you also have a responsibility to ensure your work is as secure as possible and doesn’t inadvertently introduce any bugs or viruses into a client’s systems. It goes without saying to have up-to-date anti-virus, anti-malware and firewalls in place, but don’t forget to get your processes up to speed as well, to reduce the chances of human error. Check out our ultimate guide on cybersecurity and remember your last line of defence is cyber liability insurance, which will cover for extortion, system rectification costs, PR expenses and financial loss due to system downtime.
What every contractor needs to know about business insurance
It’s because of risks like these that investing in the right business insurance is essential, so you won’t be saddled with a crippling bill if anything goes wrong.
You may find that many traditional business policies aren’t designed for contractors, due to the more flexible nature of what you do. It can be easy to find yourself with insufficient cover, or paying way too much, if you don’t shop around carefully.
To help you navigate your options, we’ve put together a quick guide to some of the policies you should consider, and how to make sure you get the best cover to match your needs:
Professional indemnity insurance
Many contractors are in the business of offering consultancy or advice, which means that professional indemnity insurance (PI) is a good place to start. Professional indemnity insurance will protect you if you make a mistake, or if a client suffers – or claims to suffer – a financial loss as a result of your work, covering legal expenses and compensation you have to pay. So, if you’re a software developer, IT consultant – or something similar - this is a popular choice. You may also find that clients insist you have PI – so it could even help you win assignments (or not lose them!).
Watch out for: if you only work for part of the year, you can save money by choosing a subscription-style model that allows you to pay monthly and cancel at any time – such as that offered by Superscript.
Read more on PI in our blog on who needs professional indemnity insurance.
Business contents and equipment insurance
Chances are there’s some kit that you rely on as part of your role, whether that’s a laptop, filming equipment or more technical machinery - so, protecting this should be a priority. Business contents insurance covers everything in the office, including your fit-out, computers, office equipment, furniture and documents. As a contractor, you should also consider portable equipment insurance, which covers everything you take out and about with you, such as laptops, mobiles, cameras and tablets.
Watch out for: if you’re based in a co-working space, you may find that insurers won’t cover you, stipulating that your belongings must be kept in a separate, locked office. So to make sure you’re fully protected, go for a PI policy like ours, which covers property left unattended in a co-working space, providing it was stolen through forcible access to the building itself, an office, locker or desk drawer. If you work on a desktop, you simply need to make sure they are attached to the desk with a Kensington Lock.
Public liability insurance
Public liability insurance protects you if you cause injury or property damage to a third party, either at your home office, co-working space, at a client’s offices, or when out and about. You may think that this isn’t relevant to you, if you’re mainly office based, but if you spend a lot of time going to events and visiting clients, this will increase your risk exposure.
Read more here about why you might need to review your public liability insurance.
Cyber liability insurance
If you work remotely and handle a lot of client data then you could also be at risk of a cyber-attack or data breach, in which case cyber insurance should be a consideration. Cyber liability insurance will protect you for a breach of data protection laws (where insurable by law) and your liability for handling data, as well as cover for extortion, system rectification costs, plus PR expenses and financial loss due to system downtime. If you tend to work within clients’ offices, using their files and equipment, then you’re unlikely to need it, but if you operate more independently, it could be worthwhile.
Watch out for: take note of the new data protection regulations that come into force, meaning the potential impacts of a breach will become even greater,with fines set to increase to as much as €20m.
Contracting can have its ups and downs and you need to stay motivated and switched on to make a success of it. Getting the right insurance gives you peace of mind and head space to focus on what you’re really good at -and what you get paid for – knowing that you’re protected, whatever happens.
(#_ftnref1)Exploring the UK Freelance Workforce in 2015 by IPSE
This content has been created for general information purposes and should not be taken as formal advice. Read our full disclaimer.
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