/ Contracting

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Pullhard 06 Jul 2019

Considering going down this route in the next few months. Keen to find out what the common pitfalls from this place of wisdom and how to mitigate them. 

Also tax and ni contributions what’s the best way to ensure I’m paying the right amount, Don't wish to be lumped with a bill from HMRC 

wbo 06 Jul 2019
In reply to Pullhard:. Depends on what you do and how good you are at it, plus market value.    I've contracted the last year's, just taken a permanent job 

two_tapirs 06 Jul 2019
In reply to Pullhard:

Moving over can be a huge, scary step, so you're starting off on the right foot by getting as much info as you can.  You don't say what industry you're in, but my experience of IT contracting:

Before you hand your notice in, take a good look at your finances, and work out what your current outgoings are.  Identify those that you're obligated to pay each month (mortgage, rent, food, car etc).  Now work out what you need to have in your bank each month just to survive, not live.  I was told when I was thinking of moving that it's good practice to have 3 months money in the bank.  Why? Well, some of my contracts pay 30 days after submitting, so effectively that's 2 months without money (1 month worked, 1 month waiting).  The extra month is a buffer in case you quit the permy job and don't land a contract to start with.

I don't know how good you are with money and finance, but consider an accountant, they can be worth every penny you pay them.  Yes, a lot of people do their own accounts, but for me,  my accountant removes so much stress from the tasks that HMRC require.  For my company and personal tax returns, my accountant does the lot, as well as payroll, VAT, all the other HMRC things that need doing, as well as knowing how to save money where possible. My accountant also tells me when I can't buy something and put it through my company.  

You mention paying the correct amount of NI and PAYE - my accountant does my payroll and each month my payslips tell me what I owe HMRC, and I pay this accordingly.

On the subject of finance, decide how you're going to pay yourself with your freelancer money; are you going to draw a small monthly salary and pay a dividend from company profits, or will you pay a larger monthly salary?  If you're going down the dividend route, it's worth considering having someone you trust (e.g. your partner, a parent) as a shareholder.  Why? Because if you pay only yourself a dividend, you'll get hit for the full amount of personal tax.  If you split the dividend between you and another shareholder(s) then your tax liability is reduced and can keep you out of the higher tax brackets. I've mentioned reducing your tax liability, so expect some UKC vitriol in 5...4...3....

Depending on how much you'll expect to earn each year you'll also need to decide if you're going to operate as a Sole Trader, or as a Limited Company.  This is something that it's worth discussing with an accountant with knowledge of your industry.  There are advantages and disadvantages to each, so discuss it with  them.  They'll also advise you on your VAT status.  I charge VAT to my clients at 20%, but because as an IT contractor I've got zero stock or anything to buy, I'm on the HMRC flat rate scheme.  This means that I can't claim VAT back on purchases (with a couple of exceptions) but I pay VAT back to HMRC at 16.5%

When your company financial year ends, you will have HMRC bills to pay, so don't take all the money out of your business account.  If you're operating as a Limited Company then you'll need to pay Corporation Tax - this is 20% of company profits (it's going down a little in 2020).

Learn about IR35 - it's something that all contractors need to know about and could save or cost you a lot of money.  TBH, no one really understands it, not even HMRC....

Something else to consider is how many days of the year you'll want to work.  My initial instinct was to work every single day possible to earn money (you won't receive and sick pay, holiday pay, bonuses, training etc) but try to be realistic.  I was advised to consider working 230 days a year, which helped with the initial working out my monthly finances before I jumped into contracting.  

The one thing I've found with contracting that really works for me is the freedom it gives me; I generally pick and choose the contracts I want; I really don't have to care any more about office politics, because being 'on the right side of someone' won't affect me in a years time as I'll have finished that contract; It took me a while to get out of the permy mindset, but now I find it very easy to switch off from work. As a contractor I'm paid for my experience, my skills and my ability.  If this is overlooked or ignored or dismissed, then generally I don't mind as I'm paid to provide a service.  If my clients decide to ignore it then that's their lookout.  I found as a perm that I'd get so invested in making sure I fought for what I believed in, it just knackered me in, because I knew that I was essentially investing my time in a company. Now I get to sleep a lot easier

hope that this helps you a little, it's gone on a bit actually  A good resource to spend some time with is https://www.contractoruk.com

Good luck with jumping in! I've not regretted making the move

Pullhard 07 Jul 2019
In reply to two_tapirs:

Wow thanks so much I owe you a pint 

two_tapirs 08 Jul 2019
In reply to Pullhard:

> Wow thanks so much I owe you a pint 

You're welcome - good luck preparing and diving in

colinakmc 08 Jul 2019
In reply to Pullhard:

My son recently went down this road. (1) accountant essential (2) in his line of work (IT/financial risk systems for banks & finance houses) he quickly discovered that contractors are paid truckloads per day to undertake a lot of boring repetitive work. After a few months he concluded that it wasn’t for him (he’s got quite a low boredom threshold and likes to be challenged)  and arranged to be head hunted back to his old place, but at a slightly higher grade. Jammy or what.

Remember no sick pay or holiday pay, no in house training courses etc so it’s all down to you investing in keeping yourself up to date in your particular line, if a better product with a different skill set comes along you have to be ready for it. He also found that even with good payers, he was 2 - 3 months waiting for his money.

But he made quite a big dent in the mortgage in nine months....

edit: re-reading two tapirs’s post it seems I’m describing another side of the same coin. 

Post edited at 16:45
Snyggapa 08 Jul 2019
In reply to Pullhard:

Been a while since I last did it but generally positive if you get the right advice and mindset.

Just bear in mind to only count money when it's actually in your bank. You can generally be terminated for no reason with no notice, and I had an agency go bust owing me thousands, or which I saw zero. And prepare not to be able to get credit like a mortgage for a for while if you need one or need to move.

coinneach 08 Jul 2019
In reply to Pullhard:

> Wow thanks so much I owe you a pint 

Make sure you claim it in your expenses 😊

Timmd 08 Jul 2019
In reply to Pullhard:

Networking well is likely very important.

Reach>Talent 08 Jul 2019
In reply to Pullhard:

Depending on what you mean by contracting (it does seem to mean different things to different people):

I did for a while, consulting for a multinational; I eventually got hired by them as a permanent member of staff so folded up the limited liability company. I understand that since I stopped the tax rate on dividends may well have increased so the break point at which being a contractor is the most financially efficient may have changed. Unless you are going to be doing all of the accounts yourself or have a lot of expenses (mileage etc.) then I wouldn't have thought it was a brilliant option unless you are earning ~£50k. I think you can claim about 40p/mile for your first 10k and then 25p/mile after that as expenses which if you are doing high mileage then it all adds up. Make sure your insurance covers business mileage or you risk getting into a fair bit of expensive trouble!

If you are turning over less than a certain threshold (maybe 64k?) then the vat registration is basically an instant bonus, I think it netted me about an extra 6% which is industry dependent. 

Not falling foul of IR35 is fairly easy, don't push your luck! It is my understanding you are covered by IR35 as soon as you have an expectation of employment beyond 2 years... So if you have a 12 month contract then at the end of that you are offered a 13 month extension you are automatically inside IR35 from the start of the extension as it will take you beyond the 2 year threshold additionally some roles are automatically covered by it (I don't know what the criteria are as it didn't apply to me), also generally going from permanent to contractor at the same company is a bit of a red flag. 

The paperwork is boring rather than complicated, I used an accountant for a while and once I had seen enough paperwork to convince myself I knew what I was doing then I did it myself and saved a few quid.

Stoff 08 Jul 2019
In reply to Reach>Talent:

Just a little note, the IR35 rules are planned to change in April 2020 and the relationship with duration of engagement becomes much less. I understand that it will become more about “direction, supervision and control”. Perhaps more significantly the decision of whether the Contractor is inside or outside of IR35 will be made by the Fee Payer (normally the Client) who will be responsible for costs if HMRC judges they got it wrong. Using an umbrella company  (not the same as an Agent) helps but it is still unclear how it will work in practice until there have been a few court cases.

If you google “IR35 changes” you will find quite a bit about it.

There is nothing to be afraid of you just need to understand the rules and ensure you know the impact.

I hope it works out for you whatever decision you make.

antdav 08 Jul 2019

I'm trying to leave the contracting business, the pros for me are all financial based, I was clearing triple the staff salary I could get which certainly makes an impact on mortgage etc. 

The negatives do add up so after 4 years in total I'm looking to move back permanent.

- my industry is cyclical, I spent 3 years barely working

- I've had to live away Monday to Friday a few times which is a bit tough on relationships. All depends on the geography of your potential client companies 

- taking 2 weeks holiday is suddenly a much bigger cost due to loss of earnings. Its a weird mindset to get over

- you work when your sick as it costs too much to take time off

- career progression is stunted above a certain level. I got accelerated levels of responsibility as I'd seen a number of projects where I got to learn from others. Then it just repeats at this level as the next level is permanent staff only. Only matters of you are career focused, many stay contacting for decades and are happy with the lifestyle

- I once experienced a targeted plan to get me released by a staff member who took a dislike to me as didn't think contractor pay was fair, (strange how permies who think this wont consider joining the dark side). Fortunately my productivity showed I was good value to the boss. Made me realise I had to keep super 'clean' in the office, no checking the news on work computer etc. 

- HMRC are useless, I got a 1k fine because they registered my house move in my profile but continued to send correspondence to the old address, as they didn't tick the box about correspondence address. They admitted the mistake but apparently it was my fault I didn't pay something I didn't know I had to pay

- Brookson are completely useless

Alex@home 08 Jul 2019
In reply to Pullhard:

I've been contracting about 10 years and I can't imagine going back to a permie job (IT).

There are 3 main reasons imo - you remove yourself from office politics, you get paid a lot more and you have much more flexibility. The second and third of those mean that I've had a couple of months off at least every other year for about 5 years. It takes a while to get to that stage. I used to think I had to have a job and took whatever was available but after a while I realised that my skills will still be in demand in a month or 2. It takes some financial discipline but to me it's totally worth it.

It's not all great. I often have to work away from home which isn't great with a young family but most clients are pretty flexible about WFH at least one day a week.

Your skills and attitude will determine how successful you are (moreso than as a permie). If you can do the job and you're prepared to make sure you deliver then you should be fine.

If you're not sure about your skills then spend a month or 2 looking at jobserve and see what jobs you can do. Don't bullshit.

I use an accountant because I want as much free time as possible and I find things like that immensely tedious. 

I used to use an umbrella company but having a limited company gives me a lot more flexibility in terms of when and how much I pay myself. 

Some clients try to insist on you going through an umbrella for IR35 reasons. I wouldn't take a job with a client like that because they don't understand the rules.

Warning - very boring but coming up...

IR35 is tax law that is designed to stop people from going permanent jobs but getting paid self employed rates. It sounds like it's not the worst idea ever but it is extremely badly thought out, it catches virtually nobody and it impacts all contractors.

If you are inside it then you pay tax and ni as an employee which is likely to make you worse off.

It used to be that you as a contractor were responsible for deciding your IR35 status with all the liabilities that went with that. A few years ago the rules were changed for public sector clients such that the client needed to make the assessment. Since most clients aren't tax experts most took the attitude of a blanket ruling that contractors are inside IR35. Many public sector clients are now either struggling to get contractors or they are relaxing their opinion.

Next year the rules will change again so that medium and large private sector clients will have to make the assessment. It is not yet clear what impact this will have but I don't know anybody who's looking forward to it!

The decision has nothing to do with how long you work somewhere (the 2 year rule is about travelling and subsistence expenses). It is about how your contract is worded and whether you actually work how the contract describes.

Enough of that. If you're still with me then I'd just add that it seems really daunting before you do it but once it gets going things get easier pretty quickly. It's easy to get information overload and that's another place where a good accountant can help you make sure you are doing what you need to (I use SJD fwiw. Not the cheapest but great service).

Good luck!

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