A checklist and timeline for new Contractors

It can be both exciting and nerve racking to decide to leave full time employment and become a contractor. It can also be a very rewarding experience, but it’s important to be level headed and well prepared in order to take full advantage.

We’ve compiled a brief checklist and timeline of the things you need to think about when planning to work for yourself as an IT Contractor.

Do you have what it takes?

You’re sat at your desk, currently working as an employee, watching those contractors swoop in and make more money than you. Nobody asked you, but you can do what they’re doing. Sound familiar? Or maybe you have a friend who’s a contractor and it looks like you’re paying far more tax.

This may be true, but it’s important to be aware of other factors. Yes, contracting is rewarding financially, but you have to make sure you’re consistently in work which isn’t always easy and there’s administration involved such as accounting. Yes, you don’t have a boss to report to, but you’re still held accountable for your work. Yes, you get to work on exciting new projects, but you have to find those projects yourself or work out which recruitment agencies are actually able to help (I.e. not spouting hot air claims).

If you’re prepared to work through these then, yes, contracting might be for you.

Finding a contract

Assuming you have what it takes, the next task is to begin to look for a contract, you need to make sure you have all the required skills and experience necessary to be one of the best in your field. Targeted CV’s, making use of your network to find opportunities, putting your CV on job boards and contacting recruitment companies are all part of the process.

Before you take the plunge, make sure you’ve found job roles and matched your skills to it. It’s also worth speaking to a specialist IT recruiter who can review your CV in line with the types of candidates they’re looking for and provide feedback.

Limited Company or Umbrella

As a contractor you’ll need to make a decision on whether to operate as a company or an umbrella employee. There’s lots of decisions involved in this process but here’s the top three:

- Are you really a disguised employee? You’ll hear lots of acronyms like IR35 and SDC branded about. The long and short of these are ‘do you look like an employee’. If you do then it may be better to operate as an employee anyway or under an Umbrella employment for the simplicity.

- Are you competent to run a limited company? Running your own company means being a director and although this is a good accolade, it comes with responsibility and administration. A good accountant can help with this process but you are responsible for making sure the company runs compliantly.

- What’s the tax efficient way of working? – Assuming you are acting as a business and not a disguised employee and assuming you are competent to run a limited company, many do choose to act as a limited company. Generally, if you’re earning over £150 per day a limited company works out to be more tax efficient than other routes. You can get a personalised illustration which is more bespoke and can define how your take home pay might differ depending on whether you are a limited company or umbrella employee.

From here on in, we’re going to assume you’ve chosen to be limited company as this is generally the most common scenario for an IT Contractor.

Limited Company Logistics

There are certain logistical steps you’ll need to go through to be ready to operate as a Limited Company which can take up to a month to complete, so make sure you prepare well in advance. The main three elements required are:

Create a company – You’ll need to choose a name and incorporate a company with companies house. This takes up to 48 hours. More can be paid for same day creation (must be before 3pm). Some accountants, like PayKeeper, provide this free as part of their service.

Set up a bank account – There’s quite a range on this but here are a few key criteria. It’s often more flexible to work with a high street bank account, particular those you already bank with personally. The challenge sometimes with high street banks is that it can take a while to set up, normally up to 14 days, but sometimes longer. For speedy turn arounds there are bank account providers who can have you ready to go in one phone call, this is great for those looking to move things quickly but does come with generally higher costs for transferring funds and other transactions.

Insurance – All IT Contractors are likely to need public liability insurance and professional indemnity insurance. Simplified, these protect you against mistakes you make as a business that affect anyone except yourself and for any incorrect expert advice you provide to your clients.

Sign Contract – In order to sign your contract most clients will want to see your company details and this includes your Unique Tax Reference which is sent in the post after you incorporate the company. This takes about ten days. Sometimes the clients willing to wait but this can sometimes mean the loss of a contract for those that require immediate starts. It’s often better to have this in place so that you’re ready when you start your first contract.

Get Paid – Obviously, in order to get paid you need a bank account, however, this must be your business bank account. The business bank account cannot be set up until the company has been created so make sure you allow plenty of time so you get paid at the earliest possible opportunity. Also, make sure you’ve agreed payments terms in advance of the contract, remember, you’re not an employee being paid monthly any more so some clients may like to pay you after sixty days.

Accounting

It’s possible to do your accounts yourself, if you’re willing to put the time and effort in to learn the relevant legislation and processes, but, it’s not easy to make sure you’re maximising your tax efficiency.

Of course we would say this, but we recommend you get an accountant to help with the finances. At PayKeeper, we don’t just help with finances, we help with all of the limited company logistics by helping you find the best services available.  But there are many different types of accountants that will suit different people.

For those looking to keep costs to a minimum there are accountants that outsource to countries in Asia who provide mostly an online service. Or there are UK accountants who offer very basic services for basic prices which suit those that prefer to do most of the work themselves.

We suggest not looking at offshore or trust based schemes as HMRC are cracking down on these and they are unlikely to be compliant.