Contracting: Frequently asked questions

If you’re thinking of becoming a contractor, you’re likely to have a number of questions you want to ask. This is only normal, because it is a drastically different way of life to that of a full-time salaried worker. Here is a selection of the most common questions.

What are the benefits?

Although the actual work you do will be very similar when completing projects as a contractor to what you are used to as an employee, working on a freelance basis is distinctly different.

First of all, you are likely to earn more. Clients are usually willing to pay contractors more than they would a member of staff, so you will often find yourself working alongside people who are getting paid less than you for working on the same project. This is commonly because clients are willing to accept a higher expense in the short term while the work is completed, because they know they do not have to carry on paying you once the project is finished. You will then be able to move on to the next contract.

The flexibility afforded with this career route is another key advantage, as it allows you to choose when, where and how you work. Contractors are able to combine their working lives with commitments in other areas – childcare, for example – ensuring they have far more freedom than as an employee.

How do I get started?

If you are convinced that contracting is something that might work for you, then you must decide whether you will set up your own limited company.
However, a piece of legislation called IR35 might just take this decision out of your hands. If you choose when, where and how you work, then you are likely to be deemed to be self-employed by HM Revenue and Customs (HMRC) and are free to set up a limited company.

On the other hand, if the client dictates your working hours and conditions, you will be considered to be an employee and so will not be permitted to operate as a limited company.
If this is the case, you should look to enlist the services of an umbrella company. Because this company will act as your employer, you will be able to access contracts from clients that are unwilling to deal with sole-traders.

Do I need an accountant?

Operating under an umbrella company takes away all the administrative and accounting tasks, leaving you to concentrate solely on contracting. You simply submit a timesheet and expense claim to the umbrella company and it will sort out everything else, including making tax and National Insurance deductions on your behalf.

However, if you are planning to set up a limited company, you will be required to keep accurate and detailed books, as well as making your own tax and National Insurance payments.

Fortunately, you can engage the services  of an accountancy services provider such as PayStream to assist you with these aspects of contracting that you are likely to be unfamiliar with. They will usually store your accounts as well, which can be a significant bonus as HMRC requires you to hold on to them for a minimum of five years.

The services of such a company will also be useful when you are required to fill in an annual self-assessment personal tax return.