It’s natural to feel apprehensive about making the transition from a permanent employee to working for yourself. For many becoming a contractor is a big step; it’s a big step mentally rather than practically and there are many great resources and lots of support out there to help you make the change.
Is becoming a contractor really that hard?
When you speak to contractors and consultants about what the most daunting part of going it alone was, they often say it’s the perceived lack of security or stability and getting things right. The security and stability element centres around ensuring there’s enough work coming through the door and lining contracts up for the future. Getting things right tends to centre around setting up your limited company correctly, getting the figures right and reporting them to HMRC – we’ll talk about this shortly.
Build your own stability and security
Having your own business, working for yourself and contracting are attractive because you’re in control and the monetary rewards are considerably more than in a permanent role. Your hourly or daily rate is higher because you are effectively paid for what you deliver. You’re not an employee so you don’t get paid holidays, healthcare, perks and paid sick leave; instead you get more money per hour to manage these outgoings yourself.
You create your own stability and security by ensuring you have the right sort of contracts lined up and by planning ahead. The main areas to concentrate on to build stability are:
- Going for the right sort of contracts. Going for the top-paid roles is tempting but it is also worth ensuring that the contracts fulfil your long-term goals. Ensure that they build your expertise or provide new experience or skills. Every contract you take either contributes or detracts from your value as a contractor. That’s not to say decline contracts when times are tough, but keep an eye on your wider personal and company development plan.
- Planning ahead. Don’t wait for a contract to end before lining up your next client or project. It may sound obvious, but new contractors can get wrapped up in the current contract and leave it too late to line up a new assignment. If you prefer to hop from contract to contract without a break, then plan for this in advance.
- Working on client relations. This goes wider than the clients you work for; see your recruitment agents as clients too. They are the gatekeepers to your future contracts and you are the commodity that they are selling to their clients. Simple client management is all that is needed to ensure you are at the forefront of the recruiter’s mind: regular contact, keeping up to date with industry changes, and treating everyone you work with as a potential client of the future. People buy from people – you are your biggest asset and you need to ensure that you portray yourself as you want to be perceived at all times.
- Retaining a solid contingency pot. Even with careful planning and a good pipeline of contracts, you can find yourself unable to work. Most contractors work on retaining at least three months’ earnings in case of a break in contracts. Whether you invest the cash personally so it keeps earning you money, or keep it within the business to maximise tax efficiencies, preparing for a dry spell gives you the confidence to be choosier with opportunities.
- Investing in yourself. Self-development through a mix of the right contracts, development courses and industry events will keep you one step ahead of competing contractors. Keeping your skills and experience fresh is critical to ensuring you secure future contracts. One of the benefits of working for yourself is the flexibility it offers around how you develop yourself; you choose what areas you’d like to develop and when.
- Protecting yourself. Having the right level of cover for yourself and your business reduces the risk of economic ruin should the worst happen. With the rise in the number of contractors, there has been an increase in the number of tailored insurance solutions for business owners contracting and consulting. Having the right level of cover not only gives you peace of mind, but in some cases it is a mandatory stipulation by the client for you to cover a certain level of insurance.
Get things right
Setting up and running your own limited company is the most tax efficient and often the most rewarding way to enter into contracting or consulting. You are your own boss; but with this comes responsibility. It is often the most daunting element when you first start out as a contractor. Neil, now a seasoned IT contractor and multiple business owner, remembers what it was like starting out.
“Business stability was a big thing for me and part of that was ensuring that HMRC are satisfied with my submissions. Don’t try and do the numbers yourself; delegate and employ experts to look after the financials and dealings with HMRC. It’s great being involved, but you need an expert to check it’s all correct and submitted properly.”
This is echoed by many other contractors. But it’s not just about making sure the figures add up.
Getting things right first time ensures your business runs smoothly and you don’t waste valuable resources and money trying to fix things after the fact. When you start up as a contractor there are definitely areas you can save on, but having the right expertise to call on isn’t one of them.
When you’re looking for expert advice and resources, ensure that the professionals you choose have specific expertise in the contractor market; the most valuable professionals to contractors starting out are:
- An accountant – the accountant you choose goes a long way to ensuring that your submissions are correct and on time. Plus you don’t want to spend hours bookkeeping, invoicing and balancing the books. Look for a complete solution. Plan ahead, as your business grows (or your earnings) you’ll need tax advice to maximise your earnings. An experienced accountant can ensure you are paying the right amount of tax through salary and dividend splits as well as more complex corporate and personal fiscal management strategies.
- A contract and IR35 specialist – most contractors will require basic terms and conditions plus a contract for services. If you are contracting via an agency, they will draft the contracts or the client will, but it is best to have an expert look over the contract to ensure it meets IR35 criteria and it protects you in the case of dispute. Having comprehensive T&Cs will ensure that your core working practices and payment terms are stated up front, meaning you’ll have fewer problems with contracts and late payments in the future.
- An independent financial advisor (IFA) – running your own business and paying yourself means you have more control over where you invest your money, how you can make it work harder for you and what you want to protect. Having a good IFA means that you’ll make the most of your earnings and have the right level of insurance cover in place. Insurance, pensions and investments are complex and require specialist advice and using an IFA and insurance broker who specialises in contractors and consultants will save you time and money in the longer term.
While considering becoming a contractor or consultant, now is the time to start looking around for the experts and services you need to help you run your business; this will leave you more time to win contracts and clock more billable hours. Trying to scrimp on hiring experts is false economy; hiring the right experts for your business means you get things right first time and you certainly don’t want to make any errors when submitting your financials to HMRC as this can lead to fines and investigations.
There are many specialist accountants, IFAs and legal professionals that have expertise in the contractor market so competition is fierce keeping the costs manageable. Shop around, look for credentials and good reviews; then take the time to talk to each potential supplier and get a feel for what they can do for you as a business and how they will look after you as a client.
So with the aid of experts to help with the administration of your business, are you a contractor or consultant at heart? We’ll explore the skills, attributes and personality of a contractor and consultant in the next article.