Everything You Need to Know about Working as a Contractor
Working as a contractor in the UK can be a rewarding career choice, offering flexibility and the potential for high earnings. However, it also comes with its own set of challenges and considerations. This article explores the key aspects you need to understand before embarking on a contracting career.
Considerations Before Becoming a Contractor
Market Conditions and Demand: The market for contractors is ever-changing, with varying demand for different skills. It’s crucial to research thoroughly to understand the demand for your skills and the likelihood of securing a contract position.
Financial Security and ‘Void Times’: Contracting can be lucrative but also risky. Contractors may experience periods between contracts, so having a financial buffer is essential to manage prolonged gaps without income.
IR35 Legislation: The IR35 reform of April 2021 significantly impacts the UK contracting market. It determines whether a contractor is a true contractor or a ‘disguised employee,’ affecting take-home pay. It’s advisable to read more about IR35 or consult with experienced contract consultants.
Availability: Clients often require contractors to start immediately. If you’re in a permanent role with a notice period, consult with interim consultants to navigate the transition effectively.
Contract Length and Day Rates
Average Contract Length: Contracts typically start at three to six months and are often extended. Recent research shows the average contract length is over 10 months, though shorter contracts are occasionally supported.
Determining Your Day Rate: Use a UK Day Rate Calculator to determine your charge based on previous PAYE salary. Flexibility on your day rate is encouraged for securing initial projects. Consider increasing your rate for contracts inside IR35 due to higher tax and NI obligations.
When discussing contracts, ensure you understand the take-home pay and request a Key Information Document (KID) for a breakdown of gross and net pay.
Day Rate Interim Assignments vs. Fixed-Term Contracts (FTC)
Differences: An FTC assignment is a ‘permanent’ job for a fixed period, offering employee benefits. Day rate roles pay only for days worked, with minimal benefits. For roles outside IR35, the day rate is the total package, while inside IR35 roles offer statutory benefits.
Entitlement to Benefits: On a day rate contract through a Ltd company, benefits are not typically provided. For contracts inside IR35, statutory benefits apply. Consult with accountants or recruiters for advice on benefits and pay.
Setting Up a Personal Service Company (PSC): It’s advisable to establish a PSC only after securing an outside IR35 contract. Setting up a PSC is quick but requires arranging insurances and a business bank account. An umbrella company can act as a PSC, and using an accredited one is recommended.
Additional Considerations
Hiring an Accountant: If you set up a limited company, hiring an accountant is necessary for financial advice and tax returns.
Insurance Requirements: A limited company requires Professional Indemnity Insurance with a minimum cover of £1 million to protect against professional errors or negligence.
IR35 Legislation: Each contract should be assessed for IR35 status, as it affects take-home pay. Consult with experienced consultants for guidance on IR35 criteria.
If you have any more questions about day rate or FTC contracts, don’t hesitate to get in touch with our Interim & Contract team: mail@vmagroup.com or call +44 (0) 20 7436 4243.
