Contracting 101: What you need to know before becoming a contractor
There are many appealing benefits to becoming a contractor, including enjoying the freedom of being your own boss and having the ability to charge clients what you think you are really worth.
Working as a contractor
Before working as a contractor, you should consider whether you have the skill set and knowledge to succeed working for yourself.
While supply and demand will drive the market for contractors of all abilities, those with more transferable skills are in high demand, and those with vast experience will tend to land the more lucrative contracts.
So, when considering whether to stay employed or leave your job for the freedom of contracting you need to consider:
- What level of skill is needed to succeed in my industry?
- Will the advantages of contracting outweigh the disadvantages of contracting for me?
Before you quit your job
For anyone thinking of becoming a contractor, there are a number of things to consider before handing in your notice.
You should question: How will I get my next contract? How will I get paid? How will I be taxed?
There will be certain things to arrange before you leave your permanent role to start work as a contractor. You may need to:
- Sign up with an agency
An agency can help you find contract work, negotiate terms of pay and process payments for you
- Sign up with various contractor job boards
Lots of employers advertise online, so these should be the first point of call, and will help you scope out the market
- Research the most tax-efficient ways of getting paid and consider your employment structure
Whilst an accountant can help you with paperwork and taxes, there are other ways to minimise your tax liability, these can include using an umbrella company or setting up your own limited company
It’s probably an oversight for many people considering a career working as a contractor, but it is important that you are insured for a number of reasons. Apart from covering your back, many employers will not consider you without it.
There are various types of business insurance policies available for contractors, designed to cover a wide range of risks, dependent on the industry you will be working in.
For example, a business insurer offering ‘all risks cover’ will be offering insurance against all eventualities and any exclusions will be clearly detailed. Some of the insurance types you need to consider include:
- Public liability insurance
To protect your business from third-party claims for damage or injury
- Legal expenses cover
Should a client take legal action against you, then legal expenses cover will typically provide £100,000 of cover against financial loss
- Personal Accident Cover
As a contractor you will not qualify for any sick pay or be covered by your employer’s insurance. Therefore it’s worth considering a personal accident policy which would give you a weekly income should you lose income from days not worked, or a pay out in the case of permanent disablement
Securing your first contract
For all contractors the biggest hurdle is always securing your first contract.
As a rule of thumb, contractors generally begin applying for new contracting roles around two to three weeks before their current role ends.
If you are moving from permanent to contracting, it’s wise to research what jobs are available before leaving your current position. In either case, it’s probably a good idea to have some money set aside in case you do not move from a permanent position to a contract job immediately.
Depending on how you set up as a contractor you will need to create invoices to ensure you are paid by your client on time. Whilst there are various software packages and tools available, you will also need to think about time allocated to this. Spending too much time organising your paperwork or chasing late or unpaid invoices can be frustrating and take the focus away from what you enjoy doing – your contracting work.
If you process your own invoices, these will need to include all relevant and important information such as; your name, business name, business address, and, if you are a limited company, your company registration number. You may also be VAT registered. If so, this will also need to be stated, along with your VAT number.
Our free invoice template is easily editable and is ready to send to clients – download it here.
A cost-effective way of making money
Whilst setting up as an independent contractor will require a large investment of time and energy, and focus on new tasks like keeping up-to-date with tax legislation, it will be a rewarding journey.
When you begin working as a contractor you’ll discover that this can be the most effective way of making money, not only that but an enjoyable career move, due to working with a variety of projects and teams. You will develop new skills and relationships, and soon find the rewards are more than just financial.
For more information:
At ContractingWISE, we are always here to help. To find out more about becoming a contractor, read our guide here.
To get going straight away, download and complete our free contracting checklist here.