Research the IT contract market
If you intend to become an IT contractor, you need to understand if there is a demand for your type of expertise, rates and also the size of your competition.
There are several job sites that list IT contract jobs and often they show the count of applications for each position. Before moving in this direction, make sure you have a good chance of securing a contract.
IT contracts types
The UK has a legislation called IR35 which is very relevant to IT contractors. The contract you might be interviewing for may be classes as “inside IR35” or “outside IR35”.
The classification of the contract will have a direct impact on how much tax you pay and will be a guide to how you should structure your self employment.
Contracts outside IR35 are sought after a lot more because they allow IT contractors with a limited company to be more tax efficient. If you land a contract inside IR35, you will pay higher tax (like an employee would) and you may find that the client insists on you registering with an umbrella company.
The reason for such a request is to ensure that you pay the correct tax to HMRC. If you don’t, your client may be liable for any shortfall. One of the functions of an umbrella company is to deduct the right amount from your pay.
PAYE vs umbrella vs limited company
We said above that you can either contract as a sole trader or set up a limited company to become more tax efficient.
As a sole trader you will have two options:
PAYE through a recruitment agency
If you have secured your IT contract through a recruitment agency, some will offer you to enrol in their pay as you earn (PAYE) scheme. This effectively means you become liable for tax and national insurance on everything you earn.
You won’t have the hassle of having to set up your own limited company but nor will you have control over your own tax affairs.
What is more, you won’t be able to claim business expenses to reduce your taxes and you will need to arrange your own professional indemnity insurance if required by the contract.
On the plus side you won’t have the hassle of setting up a limited company, looking for an accountant or worry about getting grips with VAT and other corporate tax issues.
Registering with an umbrella company
An umbrella company is effectively an employer of IT contractors. They act as your representative, take care of your timesheets, invoices, insurances, tax and more.
It’s a little bit better that the recruitment agency option in so far more services are provided on your behalf, you don’t have to file a self assessment with HMRC or worry about business insurance.
However, you’re likely to have to pay an admin fee. You’re effectively still an employee without the benefits of one, and this approach isn’t tax beneficial.
Setting up your own limited company
This is by far the most popular set up by IT contractors who are not looking to become an employee. In other words being an IT contractor is a way of life.
Some like to say that forming a limited company is more difficult than the other two options. That is incorrect. It is in fact rather easy but there are more steps to take.
You can incorporate a limited company directly online with the Companies House and have it done in about 20 minutes.
If you decide to take this route you will gain more control over how you pay yourself. Your accountant will advise you on the different options and some other tax efficient savings such as splitting your income with your spouse, how to claim back more expenses on your tax return and more.
Find an IT contractor accountant
It is highly recommended that if you decide to go down the limited company route, you find yourself a good IT contractor accountancy firm.
They can help you with all of the above, they keep an eye on any tax and legislation changes for you, they advise on the best approach to manage your earnings and they file any VAT/tax/company returns for you.
Register with recruitment agencies and job sites
As an IT contractor, you will need to keep an eye on future opportunities about 2 months before your current contract expires.
The best way to do that is to keep your CV up to date and register with relevant agencies who are always on a lookout for the right candidate.
Get the right insurance
IT contractor professional indemnity insurance is the most common insurance requirement by a contract.
Sometime you might be even asked to have public liability which is typical when you work directly with your client’s customers.