First Timer's Guide to Contracting

Many contractors who are starting out, or have decided to change the way they work, are often unsure what to call themselves. The three most common independent business structures are contractors, freelancers and consultants. At first, these may sound similar, but upon closer inspection, the differences become clear.

These three terms are often used interchangeably, but the differences are particularly noticeable when you start talking about the financial aspect of contracting, freelancing or consulting. Clients have different expectations when hiring a consultant as opposed to a contractor or freelancer, and will expect to pay differently for each as well.

A brief summary of the differences highlights that a consultant’s role is typically to evaluate a client’s needs and provide expert advice on what needs to be done; a contractor and freelancer will usually carry out the work. Contractor and freelancer roles are also usually differentiated by the engagement model used.

Operating through your own limited company

By choosing this route, you will become the director of your own limited company and be responsible for all tax contributions and relevant paperwork. If you're earning over £25,000 and keen to make a career of contracting, this could be the best option for you.

Although many new contractors find the idea of running a limited company for the first time daunting, help is at hand. Managing your own limited company with the support of a specialist contractor accountant is simple, efficient and inexpensive.

Contracting through your own limited company does require a little more work than using an umbrella company. Before you begin trading, you must complete the following steps:

Once you have completed these steps, we would recommend appointing a specialist contractor accountant to deal with your company needs and tax affairs.

You will typically take home around 75% - 80% of your contract by working through your own limited company.

Advantages of contracting through a limited company

Downsides of contracting through a limited company

  • There is a certain amount of paperwork involved, however this only takes up a few minutes of your time each month
  • Accounts need to be filed each year
  • Costly if contracting for a short period of time

Can’t decide? Get the guide

For a much more thorough assessment of contracting through limited or umbrella, download our guide.

What’s in the guide?

  • Umbrella & Limited – the differences between the two structures.
  • Advantages & disadvantages – which route is best for you?
  • Rates of take-home pay – how much could you earn?

Contracting through an umbrella company

If you choose this route, your Income Tax and National Insurance Contributions are deducted on your behalf. This may be the best route for you if you expect to earn under £25,000 annually, and are working on a short term contract of fewer than 3 months.

Contracting through an umbrella company means that you become an employee of that company. When you join, your client or recruitment agent enters a contract with the umbrella company for your services, and you enter into a contract with the umbrella company.

You'll typically take home around 60% - 65% of your contract by working through an umbrella company. If you are considering this route, our sister company Parasol can provide the help and support needed to understand this in more detail.

Benefits of contracting through an umbrella company

  • Income Tax and National Insurance contributions are deducted before you receive your salary, with no further taxes to pay
  • You will benefit from employment rights such as holiday pay, sick pay, maternity pay and pension contributions

Downsides of contracting through an umbrella company

  • You will receive a salary that is subject to full Income Tax deductions and National Insurance contributions
  • You are reliant on the umbrella company to collect your money from the client or agent and then to pay it on to you

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