What A self employed contractor is paid
What is the definition of a contractor?In the UK, the meaning of a contractor is a person thatprovides skills or services without being directly employed by any one client.By definition, contractor jobs are not permanent; they last for designatedblocks of time, which can vary from one day to several months. Working as a contractor means you can offer your skills on abusiness-to-business basis and move very quickly, securing jobs within daysrather than having to go through the lengthy recruitment process experienced bya permanent employee. A self employed contractor is paid a designated day orhourly rate and would expect their contract to come to an end on a mutuallyagreed date, which is confirmed in a formal written agreement. Limited companycontractors often use specialised agencies to secure jobs, something which isnot an option for sole traders due to Section 134 of the Income & Corporation Taxes Act 1988. Often, an independent contractor will work under a selfemployed contract. The main advantage of working in this way is that selfemployed contractors tend to pay less tax than their employed equivalents andcan take home a greater percentage of their gross fee.
A self employedcontractor is not paid through PAYE and is responsible for their own contractortax and expenses. Employment rights for self employed workers are not nearly ascomprehensive as they are for traditional employees, with only limitedprotections afforded. However, contractors can be classed as employees if theyengage the services of an umbrella company, who handle their taxresponsibilities much like a traditional employer. In understanding the definition of a contractor, it’sequally important to know what they don’t do – there are several very similaremployment terms that appear to cover the same ground but mean somethingdifferent. The difference between a freelance worker and a contractoris that while both types of workers have to deal with the HMRC directly, acontractor typically works on site for one client at a time. The classicexample of this would be an IT contractor.
IT contractor jobs are usuallycentred around a particular project or to fill a gap in the company’s skillset. In contrast, a freelancer usually works from home, can take on severalclients at once, often without a formal contract and typically specialise injobs in the creative industries such as copywriting or editing. The key difference between a contractor and a consultant isthat though both are highly skilled knowledge workers, contractors are usuallybrought in by clients to address a specific project or skills gap. Contractorpay is drawn at either a daily or hourly rate and then once the project isover, they will move on. A consultant’s work structure is different: they’reusually paid on a monthly retainer or a high day rate and while they willprobably not work on site or every day, they are on-call anytime the clientneeds them. How do I set up as a contractor? If you’re looking to set up a company, the first thing youhave to do is legally define the type of business you intend to run.
This isnot about what industry you’re in, instead it’s about thinking how you intendto source your clients, the structure of your working life and how involved youwant to be in the tax and administrative side of your contracting business. Inthe first instance, you have two options: registering as a sole trader orsetting up a limited company. Self employed or limited company? Sole traders are rare in the contracting business as varioustaxation laws make it difficult for them to work with agencies. Agenciesrequire you to be a limited company because otherwise they are liable for anylost taxation you might incur. In addition, clients are often reluctant toengage a sole trader as it leaves them vulnerable to considerable cost if, inthe event of an Employment Tribunal, contractors attempt to claim employeesrights. Setting up a company as a self employed sole trader is easyand this is its key advantage. It’s also not a binding decision – you canregister as a limited company at a later date, should you wish to do so. Tobecome a sole trader, all you have to do is register with the HMRC, somethingthat can be done immediately.
You can contact HMRC and declare your intentionsby visiting their online portal or by calling the HMRC Newly Self EmployedHelpline on 0300200 3504. However, for the reasons listedabove and because becoming a sole trader makes you personally liable shouldyour business run at a loss, we strongly recommend that you set up a limitedcompany – you can read our guide to starting one here. Once you’ve set up a company andyou’ve sorted your legally required business bank account and insurance, youcan begin to seek out clients. You might do this through agencies, contractorjob forums or approaching prospective clients directly.
Make sure you have asharply written CV tailored to each client’s expectations and be prepared to doa lot of networking! How much should a contractorcharge? It’s the question every first timer asks: how do I work outan hourly rate for my services that properly reflects my worth? It’s not assimple as converting a salary to a contract rate because unlike a traditionalemployee, you’ll be responsible for a whole host of costs and taxes specific torunning your own business. A contractorsalary has to include all your expenses and benefits. It is important thereforethat you work out a rate that is sustainable and allows you to remaincompetitive in your marketplace. Working out your hourly rate involves a series of calculationsthat ensure you quote neither too high nor too low. The first thing to do is tocalculate how much of your income will disappear in the form of insurancepayments, pension plans, travel, umbrella company costs and taxation. Obviously,your contract rate cannot go below this base figure and you should be ambitiousabout setting your final daily rate.
Here are some things to consider: ? Your skill set – do you have any niche skills that makeyour presence more valuable?? Your location – contracting in London and the SouthEast will fetch the most competitive rates.? Your experience – the longer you have been working inyour chosen field, the more income you can potentially claim.? Your industry – IT contractor rates will probably looka lot different to farm contractor rates – it sounds obvious but there’s a lotof misinformation online and it’s important to make sure your research isindustry-specific. You will find talking to your colleagues helpful when you’reworking out your own contractor rates. Find out what people with similar skillscharge and then take this information to several different agencies.
Learningto negotiate early on is a big step in how to maximise your income effectively.Sound agencies out as regards their going rate – remember that their goal is tomake their margin as large as possible. It’s your job to make sure that theiroffer to you is just as lucrative – working as a contractor means that youcannot afford to underestimate your worth.
Add a fixed amount to their quotedfigure and see if they accept it. Regardless of their response, take the same offer to a several otheragencies and gauge the average reaction. This will give you an idea of thegeneral parameters of your industry and ensure that your quote is both fair andreflective of your talents. What do you need to become acontractor? The leap from permanent to contract work can be daunting butif you’re properly prepared, it can be a relatively easy process. There arefour main areas that you need to consider if you’re contemplating how to becomea contractor: clearing your work schedule, finding work, establishing yourpayment structure and making a contingency plan. Clearing your work scheduleThe nature of contract jobs in the UK mean thatopportunities can arise very quickly and you can find yourself signing acontract within days of hearing about a job.
If you are still in regularpermanent employment, you’ll find it incredibly difficult to pivot at the speedyou need to get the best jobs. There are exceptions, but it is usuallyessential for a contractor to have left their permanent job before they start acontracting business. Finding workTo find work quickly, you need to establish a network ofcontacts and have a high impact CV that establishes your value in thecontractor marketplace. You can contact employment agencies that deal withcontractors, use online job boards and utilise your existing networks. You alsoneed to think about where you will concentrate your efforts – for a UKcontractor, contracting in London offers the greatest variety of jobs and isthe most lucrative option, but you can make a decent living working elsewhereas long as you research the job market. Establishing a payment structureBecoming a contractor means deciding what kind of businessyou want to run.
Most contractors choose to set up limited companies whichmeans that you need to hire an accountant, set up a business bank account andestablish the manner in which you wish to be paid. Whether you choose to workwith an umbrella company or run a limited company, you will need to establishyour IR35 tax status so that you pay the correct amount to HMRC. Making a contingency planAs every UK contractor knows, when you run your owncontracting business, you are solely responsible for every aspect of yourpersonal and professional life, including providing yourself with holiday pay,sick pay and a pension. Before you start working as a self employed contractor,you need to know how you’re going to take care of yourself when you’re notworking.
Work out your bare minimum rate by taking account of both your regularmonthly expenses and what you have to put aside for leaner times. How to getpaid as a contractor The way you get paid as a contractor will depend on whattype of business you have set up for yourself. You will have either joined anumbrella company which will invoice the client and pay you themselves, dealingwith all the tax deductions for contract workers, or you will be a soletrader/limited company and you’ll have to invoice your client for yourcontracting work yourself. Your invoice will be based upon the payment termsyou have agreed with your client. What is meant by payment terms?Payment terms refer to the time period you’ll allow for theclient to pay the money they owe you. The law assumes 30 days payment terms,but you can specify a shorter turnaround than that: anything from 7 to 14 daysare standard payment terms for contractors. Some clients even agree to payingcontractors up front – it just depends what you can negotiate. The paymentcycle process can be long, especially if you’re dealing with a larger companywho have complex payroll practices, so it’s in the interest of both you andyour client to raise invoices as soon as they become due.
It is standard practicethat you agree payment terms in advance. Making an invoice is not too difficult – you can even searchand download invoice templates online. There are several important elementsthat your invoice needs to contain. ? Your company’s name and registered number (you can findthis on your certificate of incorporation)? If you are VAT registered, a unique identifying number(this can be anything you like but must be sequential with all other invoicesthat you raise)? Your contact details and those of the person/companyyou’re invoicing? The date the invoice was issued? A ‘tax point’ (the date you actually supplied theservices you’re invoicing for)? The full amount you’re asking for, with hours and ratesclearly defined and a short description of the work e.g.
‘IT contractingservices’? VAT rate? Any reference number (also known as a PO Number) givento you by the client? A list of expenses (including VAT) if any have beenagreed beforehand? How you’d like to receive your money and theappropriate banking details? Your agreed payment terms The list above is particularly applicable to contractors whoget paid after the work is completed but you may have negotiated differentpayment terms with your client. If you’re on a job that is likely to last alengthy period, you can invoice for your time once a month, even if the job isnot yet completed. Recruitment agency payment terms mean you will get paidregularly, either weekly or monthly – make sure to check how your agencyhandles things before you start your assignment so that you can plan yourfinances accordingly.