Guide to working as a contractor in the UK

Customisable business insurance
01 February 2019
8 minute read

Working as a contractor is becoming more and more popular. Currently, contracting contributes £100bn a year to the UK economy – and that’s rising all the time. It’s no surprise, really. Contracting holds plenty of attractions, not least of which being greater control over your work-life balance.

However, if you’re wondering how to become a contractor and reap the rewards of being your own boss, a word of caution: as a contractor, you won’t get sick pay, or holiday pay, and your monthly income is much more uncertain than it will ever be as an employee.

That’s why we’ve put together this handy contracting guide: to prepare you with everything you need to know before you take the plunge and go self-employed.

How does contracting work?

There’s a surprising amount of confusion around the term ‘contractor’. What is a contracting business? How does contracting work? What does it mean to be a contractor?

Well, it’s pretty simple, really. A contractor is someone who provides work for another party under contracted terms.

Unlike an employee, who works within the company and is paid a salary, a contractor works as and when required (or for a fixed term), invoices for their time, and is responsible for their own welfare.

What is a contractor agreement?

A contractor agreement is what sets out the terms of the contractor’s work for their client.

It should cover the work agreed upon, the timescale in which the work should be completed, the payment rate, the invoicing procedure and so on. It’s a bit like an employee/employer contract, but between two independent parties.

At times, contractor agreements can make the lines between contractors and employees seem blurred (especially in cases where contractors are subject to certain client-led rules, regs, and behavioural codes), but the core difference – that contractors control their own business, invoice for their own work, and are not subject to company disciplinary procedures – remains the same.

Starting a contracting business

So, what do you need to do to become a contractor? Well, first of all, you need to do some admin. Here are some of the key housekeeping decisions you’ll need to make:

Limited company or umbrella company?

Pin this one down before you start trading, or HMRC could sting you hard. The differences between becoming a limited company and working through an umbrella company are complex, but the takeaway is as follows:

As a limited company, your personal finances are considered separate to those of your business. So, you’re not personally liable for any losses etc. It’s tax efficient (you’ll pay corporation rather than income tax) – but it’s also a lot of paperwork.

If you work with an umbrella company, a third-party agent will effectively act as your employer. It’s a lot less paperwork, and it can be easier to get work this way – but you also lose the tax benefits of being a limited company.

Invoices and accounts

Work out how you’re going to invoice and manage your accounts before you start any work.

Consider a professional invoicing system, which will make billing your clients easy and efficient (and alert you to any late payments!). We put together a downloadable invoice template to get you started.

Working out how much to charge

Ultimately, you’re the boss of what you charge – but people won’t hire you if they can get someone to do better work for less.

Establishing what your work is worth and what people will pay for it is often a matter of trial and error, so don’t expect to get it right first time.

Many people who are just starting a contracting business undercharge, nervous about overpricing themselves. Don’t undervalue your time or your skills.

Remember, as a self-employed contractor you need to account for benefits you don’t have, like sick pay and a pension.

If you’re really not sure what to charge, don’t commit to a long contract straight off the bat, in case you later find that you’re undercharging.


IR35 is a piece of legislation which all contractors should know about. It stands for ‘intermediaries legislation’ – tax rules which apply if you are working as a contractor for a company via an intermediary. 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 can be a sensitive subject to deal with. Here are a few tips to avoid them:

  • Get all agreements in writing: Even if you don’t have a formal contract in place, make sure that you have agreed your terms in writing before you start work. That way, if there are any disagreements down the line, you have something to fall back on. If you agree something verbally, ask for written confirmation of the salient points.
  • Keep a record: Tracking correspondence with clients ensures clarity regarding what’s been agreed.
  • Learn when to invoice: The quicker you send invoices, the quicker they get paid! However, not every client runs to the same payment schedule, so check with each client regarding when would be best for you to invoice them.
Dealing with late payments

The key when dealing with late payments is visibility and sensitivity. It’s a tricky subject to broach, and you don’t want to damage relationships with your clients, but you do also have to think about your bottom line.

Remember, most clients would not dream of leaving you out of pocket. If payment is late, there’s usually a good reason (or they’ve simply forgotten!). Emails and phone calls will help you to stay on top of their minds while you try to sort the situation. But stay as friendly and polite as you can!

If time drags on and still no payment appears, you may have to take legal action. Small claims court exists for these kinds of things. However, this should always be a last resort. Try first to establish the reason for the late payment. If the client is struggling financially, for example, working out an instalment plan could help you both out of this payment pickle.

Knowing the risks

Becoming a contractor is inherently risky – so it’s worth familiarising yourself with a few of the most common pitfalls you may encounter:

  • Breach of contract: Work is not always predictable. Delays happen, things go wrong, projects don’t pan out how you anticipated. However, if you’ve signed on the dotted line with a client and then can’t deliver the goods, you could be held financially responsible. This is why most contractors have to have professional indemnity insurance (PI) - to cover your legal costs, fines and financial losses if you do face a dispute like this.
  • Intellectual Property (IP) or copyright infringement: Does a contractor need insurance? Yes, and this is why. Intellectual Property is an easy area of the law to fall foul of without realising. It’s equally easy for someone else to mess about with your own IP. So, you need to make sure that your own intellectual property is covered by trademarking, copyrights, NDAs etc. You also need to be equally careful not to tread on or give away anyone else’s IP. Everything from designs to names, logos and any written content can be covered by IP. When using the IP of others as part of your work, make sure that you and/or your client has permission or 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 are working with data like names, email addresses, dates of birth, or telephone numbers, then you could be held responsible for any breaches. Your work must comply with data protection laws, both in the UK and any other market where it’s applicable. Non-compliance could bring fines of up to £500,000 down onto the heads of you and your clients. You can find out more about the General Data Protection Regulation at the Information Commissioners Office. Consider cyber liability insurance, which can cover your legal fees, fines, and any other expenses in the event of a data disaster.
  • Defamation: Defamation is a particularly relevant issue if you do something like develop an app or software which allows user-added content. You could be liable for any defamatory, infringing or unlawful content that is posted by others. You – and your clients - have three options to avoid liability 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. Whichever you choose, you need to have firefighting policies set up. Again, PI can ensure you’re protected for any oversights.
  • Cyber-attacks: Cyber criminals are becoming more sophisticated all the time. It goes without saying that your anti-virus, anti-malware and firewalls should be up to date, but don’t forget to get your processes up to speed as well. And remember, your last line of defence is cyber liability insurance, which can cover you for extortion, system rectification costs, PR expenses and financial loss due to system downtime.

Do I need contractor insurance?

As we’ve mentioned above, ‘Yes’ is the short answer to this. However, you may find that a lot of business packages aren’t designed for small, flexible, independent businesses.

So, 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

If you make a mistake which costs your client, PI covers legal expenses and any compensation you may have to pay. This kind of insurance is particularly relevant for contractors which offer consultancy or advice.

Read more on PI in our blog on who needs professional indemnity insurance.

Business Contents Insurance

Protecting the tools you work with is extremely important. If you work from a fixed premises, Office Contents Insurance can cover everything within that premises. Also consider portable equipment insurance, which protects the tools which travel with you.

Public liability insurance

PL protects you if you cause injury or property damage to a third party while working. 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, your risk exposure increases.

Read more here about why you might need to review your public liability insurance.

Cyber liability insurance

This is increasingly relevant as more and more of us are working with sensitive online data. Cyber 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. This is very worthwhile if you operate using your own independent system.

In summary, contracting can have its ups and downs. 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!

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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