How Contracting Works

If you’re looking for an alternative to full-time employment and you’re considering becoming self-employed, you may have thought about working as a contractor. To help you take the first steps, we’ve outlined all you need to know about contracting and the different business structures available.

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What is a contractor?

A contractor is a professional who provides services to clients for a limited period of time. Usually, they will be hired for their specialist skills or knowledge or to fulfil a particular project and paid at either an hourly rate or a fixed fee for that contract.

Why should I become a contractor?

Everyone has their own motivation for becoming a contractor. Some of the most common are:

• Being your own boss – which can be extremely enjoyable and satisfying and help you to strike a better work-life balance.
• Making more money – contractors are usually paid a higher rate than full-time employees who carry out a similar role, so it’s likely that earnings may be greater. Give our take-home pay calculator a whirl for a more in-depth breakdown of how much you could take home.
• Having freedom over working hours – being your own boss means you can, to varying degrees, choose where you work your working hours and when to take holidays.
• Experience a wide variety of work – by moving from project to project or working on multiple projects at the same time, contracting opens up opportunities where you can develop a varied experience and build an impressive contractor CV.

Working as a contractor

Two of the most common ways for a contractor to operate are usually through a limited company or under an umbrella company. The route you choose will depend on your individual circumstances, the level of responsibility you’re looking for and how much control you want over your money.

Contracting as an umbrella employee

Working under an umbrella company means that you will become an employee of the company. You have a contract of employment for a fixed period of time, under which time the company will manage your tax and National Insurance and pay you a salary.

Companies like Parasol will take care of your finances, which can help to alleviate some of the pressures of self-employment. It also means that you will be entitled to employee benefits such as sick pay, maternity and paternity cover and business expenses and you don’t need to worry about whether your assignment falls under IR35.

Working through your own limited company

Setting up and working as the director of your own limited company is seen as a popular choice for contractors and is seen as the most tax-efficient way to operate. As a limited company director, you will control your own invoicing, your company bank account and can take advantage of tax efficiencies such as paying yourself a combination of salary and dividends.

As a limited company director, you will be responsible for all of your financial and statutory responsibilities, but hiring an accountant can help you to relieve some of the pressures.

For more information about the differences between the two, give our limited company vs PAYE umbrella guide a read.