How to set up in business as an IT contractor

Few who decide to become IT contractors live to regret it, thanks to the greater financial and personal freedom they enjoy, but that doesn’t mean there aren’t risks involved.

So how exactly do you go about it, and what are the main points to consider? Here is our 10-step guide to help prepare you for what lies ahead.

1. Make sure it’s for you

Whether you’ve just started thinking about it or have been mulling the move over for a while, it’s important to be clear about what becoming a contractor involves.

A permanent job comes with a regular salary and other benefits, whereas life as a freelance offers fewer certainties.

You can earn a lot more as a contractor and enjoy being your own boss, but to succeed, you’ll need to be good at what you do, be a self-starter, and be willing to accept more risk. Be honest with yourself before deciding whether or not contracting is for you.

2. Do your market research

How much demand is there for contractors with your skills and experience, and what rate can you charge for your services?

You may already have a good idea about rates from speaking to other freelancers. Look at the latest contract rates at IT Jobs Watch.

If not, check out the various contractor websites for opportunities, where the jobs are, the types of contracts available, and the rates of pay. Some of the leading contractor sites are ITContracting.com and Contract Eye.

3. Get your CV in shape

It’s hard to overstate the importance of an up-to-date CV highlighting your skills and experience.

This is the first thing recruiters look for, so make sure this information is prominent and clearly presented.

A well-presented, professional CV should be grammatically correct, free of spelling mistakes, typed using a uniform font and (ideally) no more than two pages long.

By all means, include a covering letter with your CV, but keep it concise.

Remember, recruiters often do their own pre-screening of potential candidates, so if you are on LinkedIn (as any professional contractor should be), make sure your online profile and CV are up-to-date and consistent.

The CV & Interview Advisors have helped thousands of contractors brush up on their CVs and LinkedIn profiles.

4. Where will you find contract work?

There are several ways to secure contract work and it’s important to consider all options.

Most contractors (some 80%) find work through an agency while the remaining 20% work directly for end-clients.

Registering with more than one agency, especially those specialising in your skills or sector, makes sense as this increases your chances of being offered work.

Job boards are another source of opportunities. Just make sure you choose the relevant filters to ensure you get postings relevant to your skills and location. Try CW Jobs, Technojobs and Total Jobs to start with.

LinkedIn and other social media sites are widely used by recruiters seeking candidates and contractors looking for work. They can also be a great way to network and get word-of-mouth contract recommendations.

5. Choose a company structure

Most IT contractors set up a limited company or join an umbrella company.

You become an employee if you sign up with an umbrella company.

The client pays the umbrella upon receipt of your invoice (weekly or monthly). Tax, NI, and any other employment costs, pension contributions, and umbrella fees are deducted before you receive your net pay in your bank account.

It is a hassle-free way to contract, although your take-home pay will be less than if you work through your own company, and your contract work is not caught by IR35 (see below).

With a limited company, you are responsible for all the paperwork, dealing with Companies House, and paying tax and VAT.

Fortunately, dozens of experienced contractor accountants will happily relieve this administrative burden for a monthly fee.

6. Administrative responsibilities

As mentioned above, as a limited company director, you are responsible for keeping accurate accounts, completing an annual company tax return and paying corporation tax on profits.

Even if you employ an accountant to do this for you, you should still ensure you understand how everything works and what tax relief you can claim as a director.

If you work via an umbrella, everything is done for you. From an admin point of view, all you need to do is submit your timesheets on time. The umbrella handles everything else, from invoicing the agency to running your payroll.

7. Are you available?

Typically, clients want you to start as soon as possible, and being able to do so clearly gives you an edge over other candidates.

It’s your call when you decide to give up your permanent position, but you can always start applying once you’ve handed in your notice. Your employer may also allow you to leave before your notice period ends.

8. Beware of IR35 and the Off Payroll rules!

IR35 is a complex rule that covers your employment status as a contractor (and tax liability).

Make sure you understand the implications of IR35 before signing a new contract. If your contract work is deemed to fall under the IR35 / Off Payroll rules, your take home pay will be considerably reduced.

Put simply, IR35 was first implemented in 2000 to prevent employees from returning to the workplace as limited company contractors—performing the same roles as before but enjoying the tax benefits of working via a company.

‘Off-Payroll’ rules were added to the original IR35 rules in 2017 and 2021, which means that the end client is now responsible for determining whether a contract role falls within the IR35 net. At the start of a contract, they issue you a Status Determination Statement stating your employment status.

Beforehand, limited company contractors could self-certify their IR35 status.

Unfortunately, the Off-Payroll rules have slowed the contracting market. Some clients are reluctant to certify the status of their contractors, and many implement ‘blanket bans’ on limited company workers, insisting that all contractors use umbrella companies. Hopefully, as time passes, clients will be more confident about regularly using limited company workers.

When you receive a draft contract, we recommend that you run it by an IR35 status expert to ensure that the wording of the contract and your working practices are outside IR35.

You might consider the relatively inexpensive benefits of IR35 insurance, too.

Qdos is the market leader for both IR35 contract reviews and contractor insurance. We’ve worked with them for over 15 years. You can get a quote and find out more here.

9. What else?

There are lots of other things to consider. Bear in mind that, however you trade (limited or umbrella), your accountant or umbrella manager can help you set up and run your new contracting business.

Other things to consider include:

• Banking: If you work through a limited company, you must open a business bank account, as your company is a distinct legal entity. If you work through an umbrella, you do not need to set up a separate account.
• Insurance: As outlined in your contracts, make sure you have professional indemnity and any other relevant insurance cover. You must pay for this through your company if you’re a limited company contractor. Most umbrella companies have blanket insurance policies in place as standard.
• Choose an accountant/umbrella: Research the market before you choose an accountant or umbrella company. There are hundreds of suppliers, ranging from bad to excellent.

10. In the future

Stay informed about emerging technologies and industry trends. Go on courses to keep your skills up-to-date.

Sharpen your interview skills, join LinkedIn and network with fellow contractors to find new opportunities.

In short, do all you can to put yourself in a prime position to land those lucrative contracts.