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Becoming a Contractor

Let’s play a game of spot the difference: on one hand we have a contractor, on the other we have a permanent employee. How do they differ? At first glance, they look a bit similar. The contractor completes a project for the client, is paid and quite often works on the client’s site. And that’s where the similarities pretty much end.

What is a contractor?

A contractor provides services for a client. You can find contractors working on huge long projects, on snappy short-term projects, or on a mixture of both. Some even work with the same client for years and years. Contractors, however, get a choice over which contracts to go for, are far more independent than permanent employees and often command much higher salaries.

This independence does come with a price though: contractors won’t receive the same benefits as employees (i.e. holiday allowance or sick pay) and there is far less job stability. The problem of being your own boss is that work is rarely guaranteed. You’ll need to be highly organised, an exemplary sales person and good at marketing yourself in order to thrive in the competitive contractor market.

Legal structure…

To become a contractor, you’ll need to decide which legal structure you want to work under. The main reason for the legal structure has less to do with the law, more about how you’ll be paid. Since a little bit of legislation called the IR35, which was designed to stop companies naming their employees as contractors and taking advantage of the lower tax rates, most contractors either work as a limited company or under umbrella companies. This helps contractors to avoid the trap of the IR35 and reap the benefits of lower tax rates.

So if you want to strike it out as a contractor, you’ll need to decide what legal structure to operate under: a limited company or working with an umbrella company?

Go down the limited company route and you’ll be the director of your own company: you’ll have complete control. A limited company might also provide you with a veneer of respectability and give future clients the impression that you aren’t just a one-man-band. Consequently, you might seem more trustworthy and ‘respectable’.

Best of all, you’ll have complete control over your finances: your clients will pay you directly and you won’t have to go through a middleman. Indeed, while it might be more hassle in the short-term, you might reap bigger financial rewards later on.

Alternatively, you can use an umbrella company. They’ll act as your middleman. You’ll bill your client through them, whilst avoiding becoming a direct employee of your client. Instead, you’ll be an employee of the umbrella company.

They’ll process your payments for you and deal with various accountancy and tax issues on your behalf. The upside is that it requires less work and faffing about with finances on your part; the downside is that you’ll be subject to higher tax rates and paying national insurance.

So who will it be? Limited company or umbrella company? As “our Graham” would say in Blind Date, “the choice is yours!” Old skool TV reference alert!!!

Finding a contract…

Striking it out as a contractor can be pretty daunting. One of the most challenging parts is securing your first contract. It’s all on you: you’ll have to market yourself, network, find contracts, negotiate for them and then, finally, do a good job once you land them.

Securing a contract is all about selling yourself, whilst being acutely aware of your client’s needs. You need to show them why you’re the best person for the contract position. You can do this by showing them how you can best meet their requirements.

Besides actively seeking contracts, you can also use a recruitment agency which specialises in contract positions. Use one that specialises in your industry too. Many have a great relationship with big clients and they can be the best places to find out about new contract opportunities. At the same time, be wary of some ‘cowboy agencies’ who might pressurise you into taking less money, or might persuade you to go for contract positions that you don’t actually want.

When looking for contracts, you might want to look in the public sector too; the private sector isn’t the only option. However, be aware that public sector organisations might play by different rules than private companies: the whole process of securing a contract tends to be much longer and often they’ll be looking for different criteria.

Whether you’re applying for private or public sector contracts, always ask for feedback if your first attempt fails. The more attempts you make, the more you’ll learn how to navigate the tricky world of finding, negotiating and maintaining a career as a contractor.