How to become a freelancer30 Nov, 20225 Minutes
As the digital economy continues to evolve, more and more professionals are realising&n...
As the digital economy continues to evolve, more and more professionals are realising the benefits of contract work. Although deciding on a career change can often be challenging and daunting prospect, there are many benefits to switching from permanent employment to contracting.
Increased earning potential, job autonomy, greater flexibility and freedom in your career are simply a few reasons to switch to contracting.
If you’re thinking of becoming a contractor but not sure where to begin, we can help you make a start on your contracting career.
How to kick start your career as a freelancer
Register with recruitment agencies
As a first-time contractor, registering with an industry or market specialist recruitment agency is a great way find your first contract role quicker. Given the speed at which contract market moves, businesses often prefer to work with agencies trusting them to fill their roles quickly and efficiently. As a result, specialist recruitment agencies will often have a large pool of roles to present to you and work as the intermediary to facilitate interviews and other aspects of the hiring process between the company and the contractor.
Agencies can also provide advice on day rates, legislation and career development opportunities.
Be prepared to leave your permanent job
Most contracts will require you to interview within a few days of application if not immediately and unlike permanent roles you’ll be asked to start within one or two weeks at most. You don’t necessarily need to be unemployed while searching but it’s important to keep in mind the speed at which the contract market moves.
Deciding your payroll structure – Limited vs Umbrella
You’ll need to set up your new business in the best way so that you minimise your long-term tax liabilities, while maximising your income and making it easy for people to deal with you. In essence, your choice is between setting up a limited company or using an umbrella service company.
Setting up and running a limited company, where you become a director and shareholder, is the most tax efficient way of working and has a number of advantages, including distributing dividends and claiming certain expenses unavailable through an umbrella company.
If you are not keen on the prospect of dealing with paperwork or administration then using an umbrella company for your payroll is the best option. It is also a good option if you plan to contract in the short-term.
If you are planning to use an umbrella company then you need to ask three key questions:
- What exactly will they charge?
- Is there a minimum charge?
- What tax or accountancy qualifications does their firm possess?
With the introduction of the Managed Service Company Legislation in 2007, umbrella companies are obliged to deduct Pay As You Earn (PAYE) Income Tax from their contractors – the equivalent of carrying out a contract within IR35.
Deciding your day rate
As a contractor, you will have to decide on your rate, whether daily or hourly, with daily rates the norm for contractors within the digital economy. You’ll need to think carefully about your industry, specialism and current skill sets when determining what you’re worth in the contract market. Using resources such as salary surveys are a great way of helping you benchmark your rate against your peers. Equally, seeking a contract recruiter’s advice on rates can often be invaluable.
Remember to be realistic with your worth and keep up to date with market changes. Negotiate with the company - there is always a middle ground and if not, you may be forced to walk away and seek other opportunities.
The legal bits...
Agency Worker Regulations (AWR)
How it works:
Agency worker Regulations (AWR) legislation came into force in 2011. The aim of the legislation is to give agency workers (contractors working through an umbrella company) equal treatment, in terms of pay and conditions, with permanent staff.
AWR only applies to temporary agency workers on a temporary contract working through an employment business at a hirer's site. The legislation impacts PAYE temporary workers, those contractors working through umbrella companies and those working through personal service companies that are not considered to be genuinely in business on their own account.
After 12 weeks agency workers’ relevant terms and conditions of employment must be no less favourable than they would have been if hired direct to do the same job.
The regulations apply to working time, holidays and some types of pay.
They do NOT cover areas such as sick leave, maternity/paternity pay, redundancy and non-performance related bonuses
What you need to know
IR35 was introduced to put an end to tax and National Insurance Contributions (NICs) avoidance through the use of intermediaries. The legislation aims to ensure that a fair level tax and NICs are paid if the relationship between a contractor and a company would be considered as one of employment if it were not for the use of an intermediary.
IR35 will not need to be considered if you can prove that you are self-employed.
From April 6th, 2020, it is the responsibility of the end-client to assess the employment status of the contractor (insider or outside IR35).
If it’s determined the contract is inside IR35, Sphere Digital Recruitment will help you work through one of our approved umbrella companies. PAYE deductions including income tax and NICs will be made from your agreed pay rate and this will affect your take-home pay.
f it’s determined the contract is outside IR35, Sphere Digital Recruitment will pay your limited company the agreed rate without PAYE deductions.
There are exceptions to these regulations - for a list of FAQs, click here.
At Sphere, we are experienced with IR35 and have people on hand to give advice on this area. Feel free to contact us if you have questions via firstname.lastname@example.org
VAT and Contractors
In most cases it makes sense to register for VAT if you have registered your own limited company. It is compulsory to do so if your company’s gross income exceeds £82,000 over any 12-month period.
There are both cash and profit advantages for registering for VAT.
- You get paid with VAT included and will only have to pay this to HMRC at the end of the period
- You can claim back VAT on purchases
- You may qualify for a flat rate scheme
The Flat Rate scheme means that you agree to pay HMRC a proportion of the VAT that you receive from sales. This only applies if annual gross income is less than £150,000 and has the advantage of reducing the time spent on administration and can result in a surplus. However, you cannot reclaim VAT on purchases
- Some business, such as banks and charities, will not be VAT registered and as such will not be able to claim VAT on purchases. However, you could set up a second non-VAT company that only works with non-VAT businesses.
- Being VAT registered means filing returns and remaining compliant in case of inspection. There are many accountants that will provide services for this.
Insurance for contractors
Insurance is very important for contractors. As well as providing peace of mind, insurance also provides further evidence to remain outside of IR35 and it can often be a contractual obligation with clients. There are 3 main types of Insurance for contractors.
- Employers Liability Insurance
- Public Liability Insurance
- Professional Indemnity Insurance
Employers liability insurance
This covers claims made against you by employees or subcontractors. Clearly the likelihood of a claim being made is very small. However, if you have more than one employee it is a legal requirement and many clients will insist on you having this. The minimum level of cover is £5m but typically insurers will start at £10m.
Public liability insurance
This covers all costs relating to damage or injury sustained by third parties. For instance, if you damaged your clients’ equipment or if you were liable for injuring or damaging a third party. This will cover all legal costs and damages if you are liable.
Professional indemnity insurance
This protects you against any claims resulting from a problem with your work or professional advice. For instance, this would cover legal costs and damages resulting from a negligence claim.
Typically, insurers will provide all 3 types of cover for less than £300 a year. Just search any good comparison website.
You may also wish to cover yourself against business interruption, jury service, income protection and office contents.
If you have any questions on insurance for contractors please contact us at Sphere.