How To Become A Contractor
If you’re wondering how to become a contractor, you’re in the right place.
Figuring out how to transition from permanent employment to contracting can be challenging. Though dozens of websites offer advice, it is often difficult to differentiate between what is genuinely helpful and what is simply an attempt to get you to sign up for a ‘free consultation’.
While the life of a contractor can be incredibly rewarding, the potential risks and uncertainties shouldn’t be underestimated. As such, it is critical you take the time to really understand what contracting entails.
This guide on becoming a contractor is written by contractors for contractors. It will provide insight that will (hopefully) allow you to look at your situation objectively, offering practical tips and checklists to help you succeed.
What Is A Contractor?
The term’ freelancing’ has been mistakenly used as a sort of ‘catch-all-term for any form of independent worker. Although Contractors and freelancers both fall under the umbrella of ‘self-employed’ and often have similar taxation requirements, there are significant differences in how they operate and the services they offer.
Contractors are highly skilled professionals who provide services to a single client for a defined period under strict contractual terms. Although some contractors take on multiple clients simultaneously, this is an exception rather than standard practice.
Contractors tend to work for a defined number of hours per day and are often required to visit their client’s offices. During the projects, contractors are seen as ‘part of the team’ and are regularly offered permanent positions once their contract is finished.
Contracting is particularly prominent in the fields of IT, engineering and finance. Think developers employed for an entire product lifecycle, finance managers brought on to help with year-end or engineers tasked with continuous improvement projects.
What is a freelancer?
A freelancer is a self-employed individual who works independently, lending their specific skillset to multiple clients on a flexible basis.
Freelancers aren’t tied to a single customer, aren’t required to work specific hours, and don’t need to be in a particular location. Most work from home, although some rent studio or office space.
Freelancing can be a career in itself, or it can be done as a ‘side hustle’. Freelancing income is determined by the volume of work and the prices charged, so you can do as much or as little as you want.
There are many different types of freelancers, although it tends to be most prevalent in creative industries like web developers, designers, writers, photographers, etc.
Contractors v. Freelancers
There are a few key differences between a freelancer and a contractor:
i) Finding Work
Contractors tend to find work via recruitment agencies, although sourcing contracts directly with the client is possible. Freelancers are responsible for advertising their services and sourcing jobs themselves. Many freelancers work through marketplaces such as Upwork, Toptal and Fiverr.
ii) Clients
Contractors usually work for a single client, while freelancers are likelier to have multiple ‘projects’ simultaneously.
iii) Length of Employment
Contractors usually work for an extended period, which is defined in an engagement contract. Contracts range from 3 months to a year, although some can stretch longer. Freelancers work on an ad hoc basis, working for as long as it takes to complete the requested task.
iv) Employment Status
Freelancers are self-employed as sole traders or operating via their own limited company. IR35 has added a level of confusion to the employment status of contractors. Usually (although not always), if you’re outside IR35, you are self-employed, whereas if you’re inside IR35, you’re technically an employee of the umbrella company you work through.
v) Working Practices
As contractors usually work as part of a team, they work consistent business hours and are often required to work from the client’s offices. Freelancers can work whenever and wherever they want as long as they meet their agreed-upon deadlines.
vi) IR35
IR35 is designed for contractors. If you are a UK resident for tax purposes, your contract must be assessed through the lens of IR35. Freelancers are self-employed and do not need to worry about IR35 or perform IR35 assessments.
Life Of A Contractor
At first glance, the life of a contractor can be incredibly appealing. Earning significantly more than permanent employees and taking time off whenever you like, what’s not to love?
The answer is, a lot!
While the life of a contractor can be gratifying, it can also be very challenging. In this section of the guide, I’ll aim to explain the good and the bad of becoming a contractor. While I don’t want you to be put off by the idea of contracting, I do want you to approach the decision with a pragmatic view of what life is really like.
Increased Earnings
Contracting pays more than the permanent market, particularly when you have a high-demand skillset, and contractors regularly earn over £100,000 per year in non-management roles.
In fact, increased earnings are the most common reason for entering the contract market. To earn the same as a contractor, permanent employees will often need to climb the corporate ladder, which is often unappealing.
Not only are they paid more per day than an equivalent employee, but if they work Outside IR35, contractors can also benefit from efficient tax planning.
The bad?
As mentioned above, a decision to start contracting is a decision to become self-employed and forego almost all employment benefits. No more employer’s pension contribution, no more subsidised training, no more paid holidays or sick leave.
Given the (often significant) increase in take-home pay from contracting tends to offset the loss of employment benefits, most contractors are happy to forego them for the pay increase.
While not necessarily a problem, contractors must also be aware that earning over £100,00 per year comes with the additional responsibility of avoiding ‘tax traps’ and (potentially) filing self-assessment tax returns.
Flexibility and Variety
One perceived benefit of contracting is that you can choose which jobs to take on and which sectors to work in. If you don’t like a business, okay, don’t work for them.
When the market is good, and plenty of work is available, contracting gives greater independence regarding your projects. It can provide a great deal of variety, offering the possibility to work for several companies across multiple industries.
When the market is bad, however, maintaining a constant flow of work can often be quite challenging. If the market is experiencing a downturn, you may struggle to find a contract. When this happens, you can’t be picky about the work you accept or who you work for.
In fact, it’s not uncommon for contractors to find themselves without work for significant periods of time. This is why you will always hear veteran contractors talk about a ‘war chest’. A war chest is a cash reserve that acts as your rainy-day fund, a financial fallback intended for use if your income drops or stops altogether.
Speaking from experience, when you are into your fourth month without work, I can assure you that you won’t be overly picky about your next client or the industry they operate in.
Work-Life Balance
Contracting offers a great deal of lifestyle flexibility compared to permanent work.
As jobs tend to be short-term project-based, taking time off between contracts is feasible. If you want to work for six months and then take two months off before starting work again, you can.
If properly saved, the increased take-home pay you earn from contracting can be used to subsidise this time off. Whether you want to spend time with the family, travel, or pursue other activities, contracting makes this possible.
While this increased freedom is fantastic, you must stay on top of your finances if you want to take periods of extended leave. It takes significant forethought and planning to ensure you have enough saved to cover your bills and other outgoings when you’re not working.
Day-To-Day Working
As a contractor, you’re spared most of the office politics of trying to climb the corporate ladder. You’re hired to do a specific job, and you tend to be left alone if you do it well. There’s no pressure for you to put in excessive hours, work weekends (unless paid), or strive for promotions to secure a salary increase.
That said, day-to-day working can be one of the biggest challenges with contracting. You’re repeatedly dropped into unfamiliar environments with high expectations to perform while never having job security.
Every contract you take, every office you work in, every person you work with is slightly different. There’s no guarantee that what worked in previous roles will work in your next. As a contractor, you need to be able to adapt your communication and style of work to fit whatever situation may arise.
Unlike permanent employees, you’re given little time to ‘find your feet’. There is an expectation to hit the ground running and be effective from day one. After all, you’ve been hired as a specialist. If you cannot do the job, the client can let you go with little notice.
If you’re not up to scratch, the budget runs out, or the project finishes early, there’s a genuine possibility that a client ends your contract at short notice. This will inevitably result in a period without income while you search for your next contract.
To become a successful contractor, you need to be comfortable with the uncertainty that comes with having no job security.
Your Career
As a contractor, you gave a great deal of entrepreneurial freedom regarding how your career progresses. You choose which skills you’d like to develop and what training you’d like to do. You’ll find that you gain much greater satisfaction and return on investment when you control your own development.
This freedom can often be seen as a burden by some. Although it may feel empowering to be in charge of how your career progresses, it is a significant amount of work.
There is no HR department to ensure you’re suitably qualified. Everything needs to be done yourself. If you want to ensure you can charge a higher rate when your contract expires, you must identify any shortfalls in your expertise that may prevent you from doing so.
Unlike permanent employment, there is no structured progression. You do not automatically get a pay rise or promotion due to the length of time served. You need to earn it.
While you will find some natural development comes from years of working on different types of contracts, it is often not enough. You must proactively ensure your skillset is up to par with current trends and demand.
Self-Employed
Contractors working Outside IR35 via their own limited company are self-employed. As such, they need to maintain appropriate accounting records, pay the correct taxes, hold proper levels of insurance and more.
Whereas for a permanent employee, the company you work for will do this for you, contractors must do this themselves. Although accountants can help with the administrative burden of running a limited company, it is still ultimately the contractor’s responsibility to ensure all requirements are met.
If you are working inside IR35 via an umbrella company, then it’s slightly different. While you will still need to source contracts, all your earnings are taxed at source via PAYE, so there is less of an administrative burden.
Summary
The benefits of contracting are simple. You can earn significantly more than you would as a permanent employee while living a more flexible work-life balance.
These benefits come with significant risks, though. If contracting were an easy and safe way of making a living, everyone would do it. Maintaining a constant supply of work can often be challenging, and the increased stress that comes with no job security isn’t for everyone.
That said, if you are happy to adopt these risks for the increased rewards, then contracting could be right for you.
Why Do Contractors Earn More?
Contractors earn more than permanent employees for three main reasons: (i) They take greater risks, (ii) they’re highly specialised at what they do, and (iii) they don’t get benefits.
i) Risk
Contractors trade the benefit of earning more with the risks of not being in a secure, full-time position. If the market is in a downturn, it could take weeks to find a new contract once the old one ends.
Contractors (especially those working Outside IR35) have virtually no employee rights, especially regarding the right of dismissal. If permanent employees are let go, the employer must provide a valid justification, and the employee can expect a significant notice period (usually one to three months). Not so for contractors. Contractors can be let go for no reason and often only have notice periods of one week.
Full-time employees are paid on holidays, during their annual leave, and when absent due to sickness. Contractors are not. If a contractor has to take an unexpected leave of absence from work or the market dips and can’t find a contract for a few months, they do not earn income.
While there are some insurances you can take to offset this risk of falling sick, you cannot insure against the risk of not being able to find work.
ii) Specialised
Companies that hire contractors tend to do so for short-term roles. While contractors can be hired for ‘generic’, all-encompassing jobs (such as maternity leave cover), most contractors are hired for the specialised knowledge they can bring to a specific project.
As these projects are usually one-off or unique, it’s often hard for a business to find the necessary skillsets in their permanent workforce. Contractors, however, tend to have a great deal of experience in the industry in which they operate, and businesses are willing to pay a premium for this expertise.
iii) No Benefits
When comparing how much a permanent employee earns against what a contractor makes, it’s often easy to forget to include benefits in this assessment. Paid holiday, sick pay, employer pension contributions, training, healthcare, and more are often all part of a permanent employee’s benefits package.
Non-wage compensation is often overlooked in ‘take-home pay’ comparisons; however, it is usually worth significant money and shouldn’t be forgotten.
As a contractor, you do not receive any benefits. The only pension contributions you get are the ones you make yourself, while any insurance or professional development courses are paid out of your own money.
The loss of these ‘hidden’ benefits of permanent employment shouldn’t be ignored when considering contracting.
Who Can Become A Contractor?
While contracting can be lucrative and fulfilling, it isn’t for everyone. It takes a particular type of person to thrive under the constant pressure and uncertainty of the job. These are the five key traits I believe you need to succeed as a contractor:
i) Self-Motivated
You’re responsible for finding your next contract. If you’re not actively searching when your contract ends, tracking jobs online, and phoning agencies, then there’s a good chance you won’t work.
You’re also responsible for negotiating rate increases, paying taxes and ensuring your skillset stays relevant. There are dozens of moving parts you need to stay on top of as a contractor. If you’re not self-motivated and proactive about it, you will really struggle.
ii) Mentally Resilient
As a contractor, you must be able to cope with difficult events, handle stress, and be comfortable with uncertainty. If you’re not a resilient person, then your mental health could suffer.
I’ve personally experienced the following:
- Contracts that I was looking forward to starting getting cancelled at the last minute due to changes in budget;
- A client who decided to withhold two months’ worth of invoices for over half a year;
- A contract getting cancelled with no notice, being told on a Tuesday that it was my last day and access to IT systems would be revoked on the Wednesday (thank you, Covid); and
- A continuous period of four months without work and without earning (again, thank you, Covid).
I’m not alone with the above. If you speak to any contractor, they will have a story about something going wrong. That’s not to say that the above situations aren’t manageable. My point is that if you’re unable to deal with the unexpected, you may struggle with the contracting lifestyle.
iii) Financially Responsible
When contracting, you need to avoid the temptation of spending all your earnings. To prepare for periods without work, you should save some of your monthly income into a ‘war chest’.
That’s not to say you can’t enjoy yourself. You just need to ensure you can cover your bills and other outgoings if you suddenly find yourself without income for a time.
iv) An 'Expert'
You need to be good at what you do as a contractor. You’re being hired for your experience and specific skillset, and if you can’t deliver what you promise, you will very quickly be found out and let go.
That’s not to say you need a Ph.D. and 20 years of experience in the industry. You just need to be confident you can deliver on the job you’re hired to do.
v) Soft Skillss
You can’t rely on your knowledge and expertise alone as a contractor. To truly excel, you need to have soft skills.
Effective communication, patience, emotional intelligence, creativity, reliability, time management, and the ability to work in a team. If you can harness these essential skills, you will excel as a contractor.
Should You Become A Contractor?
This guide talks a lot about the uncertainty and all the things that can go wrong when contracting. This isn’t an attempt to scare you away from the industry; it’s more to ensure you are fully prepared for every circumstance before transitioning.
If you think you have sufficient experience, a relevant skillset, have part of a war chest already saved, and have researched the potential pitfalls, then you should absolutely become a contractor if it’s something you’re interested in.
Thousands of successful contractors in the UK have rewarding and lucrative careers. If they can do it, so can you.
When To Start Contracting
If you’re contemplating life as a contractor, you’re not alone. Every year, thousands of permanent employees make the transition. But how do you know if you’re ready to make the switch?
Unfortunately, there is no definitive catalyst that suddenly means you are ready to start contracting. No matter how prepared you are, the first few months will likely be challenging as you adjust to a different way of working.
There are several questions you can ask yourself that will help indicate whether you are ready to start contracting.
1
Do I Have The Appropriate Skillset and Experience?
This is probably the most important question you need to ask yourself, and it can be broken down into two parts: (i) do I have enough experience, and (ii) is my skillset in demand?
Do I Have Enough Experience?
Contractors are predominantly hired as ‘experts’, expected to join a project and immediately be productive. There is no ‘adjusting to a new job’ or ‘learning as you go’. You need to be able to add value straight away.
Suppose you have only been doing your job for one or two years. In that case, while you may be on your way to being technically competent, it’s unlikely you’ll have the breadth of experience to analyse problems critically. Companies that hire contractors are usually looking for someone who has been there and done it.
What is enough experience? Unfortunately, there is no specific answer to that.
I started contracting after five years, two years after qualifying as a chartered accountant. At this point, I was confident I could add value to the positions I was applying for. The situation may be different for a full-stack developer, though. After five years, you may not have enough experience to apply to roles advertised as ‘full-stack technical leads’.
Does age matter? I can only speak from my own experience, and that’s, no, it doesn’t. Having started at 27, I have never faced any age-related discrimination. If your skillset and knowledge meet the demand curve at the right point, then you will likely get hired.
That said, some roles are more suited to older contractors. More senior positions like ‘Interim CTO’ and ‘Interim Head of Finance’ will naturally attract those who have been in the industry longer and have the required experience.
Is My Skillset In Demand?
You will also need to consider whether your skillset is in demand. To succeed as a contractor, you need a skill set that can transfer from one project to the next. If you are currently working a very niche job, you could struggle to find work.
For example, if you’re the foremost expert on your employer’s outdated, legacy IT systems, your current skillset is likely redundant to the broader market.
It doesn’t matter how much experience you have if your skillset isn’t readily marketable.
My Recommendation
To determine whether you have the relevant experience and skillset, I’d recommend looking at job specs for the contract roles you’d like to apply for. Identify the requirements and respective skills, then cross-reference against your CV. If you were a hiring manager, would your CV be a good fit?
This process can help you identify specific skills you may lack.
For example, if you are a Data Analyst who works closely with Power BI and SQL, but the jobs you are seeing also require Snowflake or Databrick experience, you know that these are areas you could look to upskill.
There’s no harm in staying in your permanent role and getting hands-on experience on new projects to improve your marketability.
Another easy way to tell if your CV is appropriate for contracting roles is to talk with recruiters. They will be honest about what positions you are suitable for and what rates you can expect to receive.
2
Am I Financially Stable?
Contracting is volatile. It doesn’t matter how experienced you are or how much your skillset is in demand; at some point during your contracting career, you’ll likely experience a period where you aren’t earning any income.
For me, my worst experience was when Covid hit. I was told on Tuesday that they were letting all contractors go with immediate effect, and my IT access wouldn’t be valid come Wednesday. It then took me slightly over four months to find my next job.
Luckily, I was prepared for this scenario and could rely on my ‘war chest’ to pay my bills. A war chest is a financial reserve, separate from your regular savings account, that can cover your outgoings for periods when you aren’t working.
You also need to remember if you’re working outside IR35 through a limited company, you will need to wait till the end of your first month of work before you can invoice your client. It may take them another month to pay it, leaving you without earnings for two months.
If you don’t have financial stability before starting to contract, you could struggle should something go wrong and find yourself out of work.
My Recommendation
I’d recommend tracking all your outgoings for a single month for yourself and all your dependents. You should include everything: mortgage/rent, food, bills, clothing, taking the kids out on the weekend, etc.
Once you have a total figure, consider this ‘one month’ of your war chest.
Most experienced contractors aim to have between three and six months of cash in their ‘war chest’, although this often is something they’ve built up instead of starting with.
When looking to start contracting, saving six months’ worth of outgoings probably isn’t feasible. This often accumulates after you start contracting and your take-home increases.
That said, the more you can save before starting to contract, the less worried you will be about things going wrong. I would advise aiming for a minimum two to three months financial cushion, although it’s up to you to decide if you have the risk appetite to start with less.
3
Do I Understand The Risks?
There are quite a few potential risks you should be aware of before making the transition. These shouldn’t put you off making the switch (in my mind, at least, the pros far outweigh the cons), but if you haven’t considered the negatives, you may find yourself unprepared for what contracting is like.
Lack Of Job Security
You have virtually zero employment rights and can be let go at short notice. Depending on the market, you may be without work for a month or two between projects.
Lack Of Career Progression
It is up to you to ensure you develop your skillset and ask for increased rates if you think it’s appropriate. No one will hold your hand. If you want to command a higher day rate, you must ensure you have the knowledge to do the work.
No Benefits
You must make provision for non-wage benefits like pension and healthcare. Maternity leave is another big one. At most, all you can claim is Statutory Maternity Pay.
High Expectations
You will often work in fast-paced environments without being given any time to settle into a role properly. While some may thrive under this pressure, some may find it stressful.
My Recommendation
I’d recommend speaking to existing contractors if you have any concerns; Reddit’s ContractorUK is a great start. No one can tell you what the right choice is. Only you can decide whether you think the benefits of contracting (predominantly increased take-home and flexibility) outweigh the perceived negatives
4
Am I Doing This For The Right Reasons?
This isn’t a question that I think you need to answer, but I wanted to address it anyway. Below is a direct quote from an article on ‘What makes a successful contractor?’
“The best contractors are those who care. They have real passion – They love their job and they want to do more of it. They don’t measure themselves on how much they’ve earned but on how much value they have been able to add to each contract. They want to leave the project in a better state than when they joined.”
Excuse my French, but what a load of horsesh*t.
You do not need an altruistic motive to become a contractor; you do not have to have a selfless desire to leave every business you work with a better place.
Contractors do what they do for one main reason: additional income. Yes, the flexibility is great, and the different projects can be exciting and rewarding. But I guarantee that if the pay weren’t better than an equivalent permanent employee, hardly anyone would do it.
And that’s okay. It’s okay to want to take a risk for the potential upside of earning more.
That said, you should take pride in your work and perform to the best of your ability. You should aim to constantly add value and look for ways your experience can benefit the business. Remember, a lot of your work will come from contract renewals. If you are hard-working and a valuable addition to the team, your contract is much more likely to be extended.
How To Set Up As A Contractor
How you set up as a contractor will depend on your IR35 status.
Inside IR35
Working inside IR35 means that you have been caught by the IR35 rules, and HMRC regards the service you provide to be one of employment. You are considered an employee for tax purposes rather than a self-employed individual running their own business.
If you work inside IR35, you are subject to the same income tax and National Insurance contributions as a permanent employee. You can not utilise the salary and dividend structure in the same way you can while working outside IR35 via a limited company. Instead, you are paid via PAYE.
Paying a contractor via PAYE requires a fee-payer to run payroll. Most clients do not want to take contractors onto their payroll directly; instead, they prefer to engage contractors via an intermediary such as an umbrella company.
See our Inside IR35 Checklist for further details.
Outside IR35
Being ‘outside IR35’ means that you are running a genuine business and, therefore, operating outside of the IR35 rules. As an outside IR35 contractor, you are a limited company director, invoicing your client directly and using the company revenues and profits in a way that suits you, just like any other small business owner.
Financially speaking, working outside IR35 means taxes are not deducted at source, and you are not subject to direct PAYE via the fee-payer. Instead, the client pays the entire fee amount to your limited company as revenue. This revenue is subject to corporation tax and a mixture of income tax and dividend tax, depending upon how it is withdrawn.
As you are not subject to PAYE, you must ensure you pay the right amount of tax by submitting a self-assessment tax return at the end of the year. Most contractors working outside IR35 employ the services of a specialist contractor accountant, as the nuances of running a limited company can be tricky.
See our Outside IR35 Checklist for further details.