How to Become a Contractor (Everything You Need to Know)
According to the Office for National Statistics, the UK saw a rise in the number of self-employed individuals from 3.3 million in 2001 to 4.8 million in 2017. This figure continues to grow. In fact, between April-June 2019, 4.96 million people were self-employed, 188,000 more than a year earlier.
If you’re looking to join the ranks of millions of others before you and take the steps towards self-employment, you need to know how to get there – and Gorilla Accounting can help.
Whether you wish to become a contractor or freelancer, we aim to answer the most frequently asked questions we get as contractor accountants and help you to reach the decision that will best suit you and your career.
Am I Ready to Become Self-Employed?
The first thing to consider is to decide whether you’re actually ready to turn your back on permanent employment and become self-employed.
It’s not enough to simply have a business idea – you also need a business plan with achievable goals in place, as well as research on how best to execute this plan. Many people take the leap into self-employment to be able to be their own bosses, which means they can work the hours they want and take time off whenever they please.
However, when you’re self-employed, it’s crucial to consider what happens when you’re not working. How will you make money during a holiday or a period of sickness? Being prepared for this is vital for anyone wanting to become a contractor or freelancer.
You’ll also want to think about how you can remain motivated to keep searching for clients, to work and to do any admin that is required of you as a self-employed individual. Creating the perfect work environment is important, therefore, as you’ll want to avoid distractions and keep focused. If working from home, make sure that you have a dedicated workspace where you can work free from interruptions. Having a routine is key, although it’s also important to know when to break it.
Other questions to ask yourself before embarking in this journey include:
- How am I going to get new clients?
- Do I have enough money to start a business?
- How will I cope with no sick pay or other employee benefits?
- Do I have space to work on my business? And what about equipment?
- If working alone, would I miss having co-workers and feel lonely?
- Do I have any life milestone events in the near future to account for (for example, a wedding)
- Will my rates cover my living expenses and allow me to make a profit?
- Am I disciplined enough to be my own boss?
How Do I Register as Self-Employed?
If you’ve decided this is the right path for you and want to set up as a sole trader, then you have to register as self-employed with HMRC. After all, you will be responsible for paying your own income tax and National Insurance contributions; you can register at any time up to 5 October of your business’ second tax year.
Every tax year runs from 6 April to 5 April, which means that, if you became a sole trader in March 2019, you had until 5 October 2019 to register with HMRC. If you set up as a sole trader after April 2019, you have until 5 October 2020 to register.
When setting up as self-employed, you’ll need to choose the name you want to trade under, check which records you’ll need to keep and register for tax. You’ll also have to provide information such as your National Insurance number, name, date of birth, address, phone number, email, business name and start date.
There are several pros and cons to being a sole trader, so make sure you’re choosing the best solution for your business. Here at Gorilla, we are specialist sole trader accountants. Please get in touch if you have any questions about the services we offer.
Do I Need to Set Up a Limited Company?
Every business is different, so this is not a question with a blanket answer. For some, setting up a limited company is the best option while, for others, operating through an umbrella company is better for their business. Some of the factors that may impact your decision can include the type of business you’re running, your future plans, the financial risks involved and how important customer perception is for you.
Sometimes, an umbrella structure may be just what you need. If you’re new to the world of contracting, you may want to dip your toes in the water before taking the plunge – you won’t have to set up a company or set down as a director if you change your mind, for example. So, for individuals who are unsure whether self-employment is right for them, this type of operating structure can be the better fit.
As a limited company owner, you and your business are separate entities, so you have limited liability. This is, typically, a tax-efficient way to operate as a contractor, since it allows you complete control over your finances, which doesn’t happen if you opt to operate through an umbrella company. The downside is that there are more legal obligations and paperwork to fill out when you’re the director of your company.
We’re limited company accountants so, by choosing us, you get your very own dedicated accountant that will help you to not only set up your business but also grow it.
What is IR35 and Will It Affect Me?
As someone considering self-employment, you’ve more than likely heard about IR35. However, you may not be one hundred per cent sure of what this legislation is and how it can impact them and their businesses. Simply put, IR35, which is also called ‘intermediary legislation’, was introduced in 2000 to address the issue of disguised employment by employees masquerading as contractors in order to receive the tax advantages available.
But who can be affected by IR35?
It can be difficult to get clarity on this issue, but HMRC consider certain factors when deciding whether or not a self-employed individual is found to be inside IR35.
These tests of employment include the degree of control you have over the services provided, the mutuality of obligations that exists between you and your client (as in, is your client is obliged to offer work and are you required to accept it?), and whether you can send a substitute in your place to perform a service.
This legislation is controversial, as HMRC do not always get it right. They have accused self-employed individuals of not paying the right amount of taxes and lost tribunal cases when those individuals appealed the decision. Some of them are very high profile too, such as Paul Hawksbee and Kaye Adams. In essence, IR35 is considered too complex and difficult to be applied with certainty.
If you’re investigated by HMRC and deemed to be inside IR35, you will have to pay retrospective PAYE tax and National Insurance contributions, as well as interest and, potentially, a penalty. For some, this back-tax is in the order of the millions; for instance, Lorraine Kelly famously – and successfully – fought back against a tax bill of £1.2 million.
We can offer expert IR35 advice at Gorilla Accounting, so, if you wish to be sure whether IR35 applies to you or not, don’t hesitate to get in touch.
What National Insurance Contributions Do I Need to Pay?
As we mentioned, you will have to pay your own National Insurance contributions as a self-employed individual. This varies according to your annual profits. If you make £6,365 or more a year, you will need to pay Class 2 NI contributions on your income, which is set at £3 a week for the tax year of 2019/2020.
You are liable to pay Class 4 NI contributions if your profits are £8,632 or more a year (9% on profits between £8,632 and £50k and 2% on profits over £50k).
How Can I Establish an Online Presence?
As a contractor or freelancer, you need to find new clients, which means you have to promote your services. Establishing an online presence is one of the ways to find more work, especially as more and more potential clients are online. It can take a while for websites to become established in search engines, so the sooner you do this, the better.
Start by buying a domain name and setting up your own website, where you’ll be able to advertise your services. You will want to set up social media accounts as well, which will further help you to promote your business and interact with potential customers.
Networking is another crucial step for freelancers and contractors. A lot of networking can be done in person, be it at trade show events or at conferences, for instance, but, nowadays, it’s possible to forge new relationships and expand your customer base by online networking. LinkedIn is a great example of a platform dedicated to business, where self-employed individuals can create profiles that will help them to find work and promote themselves.
Check out our tips on how to promote your business in 2019, which we’re confident will give you ideas on how you can get your name out there.
Do I Really Need Insurance?
This is one of the most frequently asked questions about self-employment. Some contractors and freelancers may be under the impression that they don’t need insurance, but the truth is that self-employed individuals need to get insured as soon as they can (you can read more about the reasons why on our article “Why Do Contractors Need Insurance?”).
Many businesses only agree to work with insured contractors, for example; if you’re not insured, this can make it difficult for you to get the projects you want, especially from bigger clients. And even the most skilled of contractors can make mistakes so, if a client or company claims against you, you’ll be protected. Professional indemnity insurance will help you in these types of situations.
Public liability insurance provides cover if someone is injured or property is damaged as a result of your actions. While this is not a legal requirement, it can be a good investment. Additionally, your client may insist on it and ensure it’s a condition of your contract.
We can help you to get contractors insurance, so don’t hesitate to speak to us about it.
Should I Handle My Own Accounts?
It can be tempting to want to do everything yourself. After all, you became self-employed to be your own boss and to control every single aspect of your business. However, you already have so much to do, from finding new clients and working on several projects to spending time promoting your business.
So, by hiring a professional who specialises in accounting for contractors, you are saving valuable time and avoiding a source of stress. After working all day, the last thing you need is to have to worry about tax returns or whether or not you sent incorrect information to HMRC.
In addition, an accountant will help you to retain as much money as possible, since they know everything there is to know about taxes. This means that, in order to ensure that you’re maximising your profits, and accounting for every expense and allowance, hire the services of a specialist.
We handle your finances so you won’t have to worry about a thing or spread yourself thin instead of focusing on your business. Talk to us at any time and a member of our friendly and professional team will be more than happy to discuss how we can help.