The life of an IT contractor is not easy and invites risk, but with the hardships of this profession comes reward. You can potentially see greater financial gains, have more variety in the work you choose to do and enjoy the flexibility of being your own boss.
With the changes to the IR35 off-payroll legislation from April 2021 and the economical scars of the pandemic still fresh on many businesses, some are hesitant to enter the world of IT contracting. However, in the new normal of work, many organisations are looking for flexible solutions to bridge their IT skill gaps.
While life for many might be turbulent, the IT contractor market continues to be resilient, and a survey by SJD Accountancy showed that 70% will continue to operate as contractors following the pandemic and 62% would still recommend this career path to others.
If you are thinking of moving into the contracting arena but still need more information, we’ve put together this starter guide on becoming a contractor to help you on your journey.
In this article:
- What is an IT contractor?
- Pros and Cons of IT contracting.
- 6 steps for getting set up as an IT contractor.
What is an IT Contractor?
As an IT contractor, you will use your specialist IT skills to provide services to an organisation. While permanent staff members will provide services indefinitely to their employer, you would be engaged short-term with the occasional option to be extended if work is still required.
The services you offer will be delivered on a business-to-business (B2B) contract. This B2B relationship will be between the organisation you engage with and your company (a registered limited company in your own name or a chosen umbrella company, more on this later) or by a third party, like us.
You will be expected to hit the ground running and deliver services to a client from the moment you go on site. This is because you have skills the organisation does not, they are bringing you in to be the solution to their problem and expect you to make an immediate impact.
As a contractor, you will not receive the same employee benefits of sick pay, holiday pay or other traditional perks a permanent employee has but for that reason you will earn significantly more than them. You will also have the freedom to decide when you work, the types of clients you work with and gain access to a wealth of experience from different industries and projects.
Pros and Cons of IT Contracting
Pros
- More freedom and control over the work you do.
- Potential to earn more than your permanently employed counterparts.
- Lots of variety in the work you do and experience you can gain.
- You are your own boss.
Cons
- There can be a lack of job security and you might have to travel more for work.
- You only get paid when you work and do not receive permanent employee benefits.
- Running a company means more administration (however, you can share this burden with a good accountant).
- There are additional costs to consider when running a limited company.
6 Steps for Starting Out as an IT Contractor
Before stepping away from your permanent role to start your new life, we have put together a checklist of 6 things to do before taking the plunge.
- Research, research, and more research.
This is an essential step to take before starting your career as a contractor. You need to know exactly what you are getting into; how will it impact your personal life and is it the right move?
Ask yourself, do you have the right skill set for contracting and is it in demand? You may need to be flexible with your location when looking for contracts and need to know exactly how much you could be earning for your specialist services. A good way to do this is by speaking to recruitment agencies, going on message boards or looking at relevant job boards.
Do your homework and leave no stone unturned because the contracting market is fast-paced and very competitive. To quote Benjamin Franklin, “By failing to prepare, you are preparing to fail”. There are many websites and forums like Contractor UK to ask questions and learn more.
- Understand the off-payroll working rules (IR35).
Your IR35 status will change with every contract you work on and if you are going to be a contractor, you will need to know what it means. To summarise in the simplest way possible…
- ‘Inside-IR35’ – You will need to be treated like a permanent member of staff and have to pay income tax and NI like a regular employee.
- ‘Outside-IR35’ – You are deemed as truly self-employed and can access the benefits that come with that status.
Click here for our guide to the IR35 off-payroll legislation
In both the private and public sector (as of the 6th of April 2021) end clients will be responsible for determining your IR35 status. By understanding IR35 you give yourself the opportunity to counter an end-client decision if you feel it has not been made correctly or if the HMRC disputes your status.
- Register a limited company or join an umbrella company.
By registering your own limited company, you can work in the most tax-efficient way possible and have complete control over your business as you are legally in charge of it. Operating in this way suits those who have had an ‘outside-IR35’ determination on the contract they are currently working on. However, with more control comes more responsibility and paperwork such as the need for accurate account recording and completing tax returns.
Choosing an Umbrella company is a simpler way of operating as a contractor and takes the administrative burden of running a limited company away from you. You will become an employee of the umbrella company you choose, receive a net salary and have other employee benefits such as pension deductions made for you. This way of operating means you will not access the same tax benefits the truly self-employed can.
For some starting out it is easier to sign up with an umbrella company while figuring out what type of contracts you will be working on. For those starting a limited company, you will need to register your company online on the government website and pay a registration fee of £12 before accepting any contracts, it usually takes around 24 hours to go live.
- Find an accountant and set up a business bank account.
If you choose to follow the limited company route, it is recommended that you hire a specialist contractor accountant to assist you with your business. It can feel like an expense, but many contractors benefit from a financial expert’s knowledge of tax and rules. The result of improper account keeping could also incur costly penalties.
Your limited company is a separate entity from you as a person, which means you cannot use a personal bank account for your services so you will need to set up a new business bank account. If you find a good accountant, then they should be able to help you with this.
Umbrella companies offer accounting and payroll services as part of their package with you meaning you will not have to worry about book keeping if you choose this path. Make sure you check out reviews and see what other contractors are saying about the umbrella company before signing up with a company.
- Get insured.
Being a contractor invites risk and even the most decorated contractors can make mistakes while delivering services for an organisation. When things go wrong, the client you are working with could look to put in a claim against you to cover any damages.
To protect yourself from these unfortunate incidents, you can take out professional indemnity insurance to cover legal costs or pay compensation. It is rare it happens but it is better to be safe than sorry.
Many clients will put specific mandatory insurances in your contract of services so make sure you read the small print before going on site.
- Finding your first contract
Like most things, looking online is still one of the best ways to find your first contract. Make sure to follow various job boards for the latest opportunities and sign up with recruitment agencies who recruit skills relevant to your own.
Recruiters have their ear to the ground for all the latest roles and can offer valuable advice that will support your search, give insights on fair pay rates or help to improve your general CV. Persistence is key but once you get going you will start to develop your own network of contacts that will make contract hunting easier.
These steps are the fundamentals of getting started as an IT contractor, there is a lot of work to do and it is up to you to make sure you understand your new responsibilities and the complexities of your operations.
Contracting continues to be a challenging but rewarding career path for many. As a contractor, you will take back control of your working life but remember it is not for everyone. Embrace the world of contracting every way you can, stay up to date with changes that will affect your industry and do as much research as possible to make an informed decision about it being the career path for you.