Becoming a Contractor

Contracting is a massively popular and liberating way of working that over a million people in the UK currently earn a living from.

But, as with any big career choice, knowing exactly what’s required to become a contractor can seem daunting on the face of it. And the lack of advice tailored to contractors specifically doesn’t help.

So to ease your concerns and arm you with the information you need to start a contracting business, we have outlined the key points for you in this simple guide to becoming a contractor.

Steps to take when becoming a contractor

So how hard is it to become a contractor? Frankly, probably a lot easier than you might have imagined. We’ll break down how to become a contractor into bitesize points - whether we’re focusing on your business structure or new-found tax responsibilities.

Choosing a business structure

One of the first decisions you’ll need to make is your business structure. Do you want to work as a limited company contractor, contract as a sole trader, or operate via an umbrella company?

Becoming a limited company contractor

Contractors often set up their own limited company and then provide services to clients through their limited company. This is seen as a tax-efficient way of working, giving you full control of your business, the ability to claim a range of business expenses, and offering you peace of mind due to limited liability.

Opening a business bank account is another part of becoming a limited company contractor. You must do this, given your company is incorporated and a separate entity to you, the owner.

Contracting as a sole trader

If the formality of setting up a limited company isn’t your bag, but you’d still like the responsibility of owning your business - sole trader might be the way to go.

As a sole trader, you are a self-employed person, but you and your business are the same, unlike people who work through their own limited company, which is legally separate from its owners. With 3.5m sole traders in the UK, working this way is very popular.

Find out more about this way of working in our sole trader resource hub.

Becoming an umbrella company employee

An alternative to working as a limited company director is to become an employee of an umbrella company. The process of becoming an umbrella company contractor couldn't be simpler. Here’s how this works:

The umbrella company sits between the contractor and their agency or end client as the intermediary. It becomes your employer for the temporary contracts that you work on. Umbrella contractors’ pay is subject to PAYE tax, with the worker receiving employment rights in return.

Umbrella working allows you to retain the flexibility of contracting but also benefit from the protection and rights that come with being an employee.

To learn more, read our guide to contracting via an umbrella company.

Which option is best?

So which is best? In truth, it’s not a case of one being better than the other. Many contractors switch between limited company contracting, sole trader and umbrella working, depending on the type of assignment they’re engaged on.

For a direct comparison between two of the structures, visit our guide to limited vs umbrella.

Consider your tax responsibilities

If you’ve chosen to become a limited company contractor, you’ll be responsible for organising your tax. Some factors to consider include:

  • Registering as self-employed, so HMRC knows to expect your Income Tax payment via the Self-Assessment Tax Return.
  • Registering your business for Corporation Tax, which is an annual tax paid on profit made by your company.
  • Registering for VAT is a requirement when your business turnover exceeds £85,000 within 12 months.
  • Calculating, submitting, and paying these taxes either on an annual or quarterly basis.
  • Keeping a record of all your business expenses, which may prove important in legitimately reducing your tax liability.

Get to grips with IR35

While IR35 is tax legislation, it deserves its own section in this guide, given its significance to contractors.

IR35 exists to stop contractors - whose engagement reflects employment - from working as disguised employees and therefore avoiding employment tax.

If your contract falls inside IR35, your earnings for this assignment are subject to PAYE tax, like that of an employee. Outside IR35, you’re responsible for paying your own tax.

As with all taxes, being confident of your compliance is vital. We run through all of this and more in our guide to IR35.

Assess (and protect yourself from) the risks

All businesses encounter risks. So before you become a contractor, it’s worth pinpointing possible threats and exploring ways to protect yourself from them.

Risks might include:

  • Mistakes you make when delivering a service to a client, causing them financial loss which then leads them to sue your business.
  • Tax investigations, the cost of which can mount up when challenging HMRC. Potential tax liabilities can also be significant.
  • Accidents in the workplace, with clients or employees claiming compensation from your business.
  • Loss or damage to equipment needed to perform your service.
  • A cyber attack, with criminals accessing sensitive data.

For peace of mind and financial protection, many contractors take out business insurance to mitigate these risks.

While it might seem like there’s a lot to take in, becoming a contractor doesn’t need to be complicated. And with the help and support of specialists like Caroola, it’s effortless.

To discuss your options with an expert, simply request a callback and a member of the team will be in touch.

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