More and more people in the UK are making the move to becoming self-employed. According to the Office of National Statistics, the number of self-employed people rose from 3.3 million (12% of the UK labour force) in 2001, to 4.8 million (15.1% of the labour force) in 2017 (all figures from the ONS, 2018).
Although leaving employment for self-employment or contracting is becoming more common, it is not necessarily becoming simpler. The rise of the gig economy and the ease with which the internet has made working remotely has not yet been reflected in UK law, meaning there are still legal and financial hurdles you need to overcome.
However, the rising figures are testament to the attraction of being self-employed. Becoming a contractor has a myriad of benefits. If you have an entrepreneurial spirit, then the idea of employment simply means you’re making money for someone else. There’s a reason why many contractors embrace this way of working, and rarely go back to being employed.
Taking the plunge
The first step to take in becoming a contractor is purely psychological. It’s often difficult to give up the security of a regular pay check, even if you are exchanging that for freedom (and potentially more money). However, contracting can actually provide a more stable income. For those contracting with five clients, say, the loss of one client represents a 20% loss of income, which is difficult, but not insurmountable. For those in employment, being made redundant represents a loss of 100% of income, which can be devastating. A contractor, therefore, has a diversified income stream that can actually provide greater security.
However, contracting isn’t for everyone. It does require a shift in mindset and work habits. Consider the benefits and drawbacks below to see if contracting could be a good match for you.
What are the benefits of contracting?
The obvious benefit to contracting is the freedom that it brings. This means that you can work when and where you like and you don’t have to report to a boss, nor conform to corporate culture. For most people, the ability to ditch the suit and tie, the 9 to 5, and the commute is reason enough. You can set your own holidays and only take on the projects that interest you - something you simply don’t get in most employed positions.
As well as choosing your own projects - and perhaps developing a personal niche - you will be able to build a range of experiences that will develop your overall skill set. This will be invaluable if you ever do decide to get back into the world of employment.
Because you’ve effectively cut out the middleman, you will be able to command higher hourly and day rates for your work.
For example, a Junior Front End Developer in London averages a salary of £20-30k; the same Junior Developer can earn £150-250 as a day rate as a contractor. A Java Technical Architect’s salary is £50-75k, and yet the day rate for a contractor is £350-500+. Generally, therefore, day rates can surpass a salary in as few as 100-150 working days.
In addition, if you are strategic with your financial setup (and have an accountant proficient in self-employment law) you can decrease your tax payments by being more efficient.
What are the downsides?
Contracting isn’t all roses, however; if it were, everyone would be doing it. Make sure that you fully consider the downsides rather than just the potential benefits.
Working to find work
One of the benefits provided by an employer is a steady stream of work (and therefore income). If you become a contractor, you lose this. This means that a significant amount of your time - particularly at the outset of your time as a contractor - can be spent emailing potential clients, following up on leads, and submitting proposals.
Being a contractor can be an uncertain line of work. There is no guarantee that there will be another contract after the one you have just completed. Once you get established, you can smooth the gap between contracts and build up some cash reserves. However, at the outset, this can be stressful, particularly because there is no sick pay - if you happen to get ill and can’t work, you won’t be able to earn.
As the above information suggests, the most problematic downsides to becoming a contractor come at the beginning of your period of self-employment and relate to the ability to find work. Joining a recruiter-free network like wellpaid.io will help you overcome these initial hurdles, by enabling you to browse all the latest contract gigs, and filter them by key criteria - such as outside-IR35 status and skill set. And not only will you be able to reach out to hirers directly, they’ll also be able to reach out to you - making it much easier for you to find new jobs.
The legal side
Once you have decided to become self-employed, there are some legal steps you need to take to make sure you have everything in place. Since you’re changing your employment status, you will be liable for different tax responsibility (although, as mentioned above, this could actually be a lower tax burden than was the case when you were employed).
What is IR35?
IR35 is a code you will hear a lot when it comes to working as a contractor. It refers to a piece of tax legislation that is designed to protect workers, and prevent employers from using ‘disguised employees’ and paying them as independent contractors. Generally, the rule of thumb for contractors is that they should be in control of the work (what it is, when and where it takes place), they should be able to send a substitute to complete the work, and they are under no obligation to take on work.
When do you count as self-employed?
The first thing to check is whether you actually count as being self-employed. Sometimes, employers who wish to avoid payroll taxes and other responsibilities will class employees as contractors. HMRC has the following stipulations to determine whether you are classed as self-employed. You should meet most of the following criteria:
- You are in business for yourself, ‘are responsible for the success or failure of the business and can make a loss or a profit’.
- You are in charge of what work you take on, and when and how you complete the work.
- You could sub-contract the work out to someone else.
- You are responsible for fixing any unsatisfactory work in your own time.
- You agree a fixed price for work with a client - it’s not contingent upon how long the work takes you (i.e. you’re not an hourly employee).
- You use your own money to buy equipment and meet other business costs.
- You can work for more than one client.
Assuming that most of these apply, you are classed as self-employed and should register with HMRC as a contractor.
How should I let HMRC know?
When you leave employment and decide to become a contractor, you are responsible for letting HMRC know. You can do this online at the HMRC website, or on the telephone at 0300-200-3500.
You will be responsible for paying your own income tax (which is automatically taken from your pay stubs as an employee) as well as your National Insurance contributions. If you make more than £8,632 in profit per year, you will be responsible for both Class 2 and Class 4 NI (all information correct as of May 2019).
What should my legal structure be?
‘Self-employed’ and ‘sole trader’ are sometimes used synonymously to describe someone who doesn’t work through an employer or pay Pay As You Earn (PAYE) tax. Generally, this will be the default legal structure you register as with HMRC, as it requires the least paperwork and is the simplest when it comes to taxes.
Most clients will require that you form a limited company in order for them to work with you. Certainly, a limited company offers an additional level of professionalism and security that will let clients know that you are a serious, committed, contractor.
This creates an additional legal layer around the business. The plus side here is that you personally are no longer liable for business debts (which you are as a sole trader); the downside is that there is more paperwork to do (at this stage, it’s time to get an accountant and maybe even a lawyer). Creating a Limited Company will certainly look more legitimate to clients, and it can reduce your tax burden, since corporation tax rates are (as of May 2019) lower than income tax.
The money-making side
Becoming self-employed is the same as creating a business - it’s vital to think about the financial side of things. As well as pricing and costs, you need to think about marketing as well as necessary expenditures like insurance.
How do I calculate my rate?
One of the most common questions, when people become self-employed, is how to calculate an hourly or day rate. Most of the time, the rate was set by the employer, and it can be difficult to gauge exactly where the marketplaces you. Generally, your day rates will increase as you become more experienced, but it’s important to not set your price too low, or you’ll end up working too hard for too little money. It can be a difficult balance to strike.
One rule of thumb to follow is to charge 50% of market average for a given role. For example, if you are a Development Consultant, the usual day rate is £350-450/day, giving a market average of £400. Therefore, from the outset, your daily rate should be £200/day. As you gain experience and clients, you can up your rate to bring it in line with the market average. To find the market average, you can use job boards to see what companies are offering. For example, https://wellpaid.io/skill/react-contract-jobs will not only show what companies are offering but allow you to search by location so you can find what people in your area are paying.
You can also look at what others charge to get a sense of what the market will bear. Make sure to compare with people in the same niche as you to make sure you get a sense of the true price - oftentimes, comparing different niches will yield different results.
How do I market myself?
Word of mouth is usually the best way to get work from clients in the future, although to get the initial work, job boards are an extremely strong place to start. Recruiters will also be a major tool in the early days of becoming a contractor, although as you build your client base, it’s likely that your reliance on them will diminish - after all, they're not cheap. Wherever you are in your contracting career, we'd really recommend tapping into the wellpaid.io network. At wellpaid.io, we’ll help you fill up your job pipeline with ease, but take no commission from you nor your hirers - meaning that the rates clients are willing to pay are the rates that you’ll receive.
Do I need insurance?
In the UK, there is no requirement to take out an insurance policy, although it is strongly recommended even if you work in an industry where the risk of injury or damage is low. Public liability insurance will cover you in most instances and can be a relatively cheap monthly or annual expense (and it is tax deductible as a business expense). In order to have public liability insurance, you will need to form a limited company - you can’t get this as a sole trader.
Working with larger clients, most will insist on professional liability and professional indemnity insurance. Again, this will demonstrate that you are a professional and dedicated contractor and highlight the fact that you’re treating yourself as a business.
Being self-employed is one of the most rewarding and liberating ways of earning money. The idea of taking your laptop while you travel the world, earning money as you go is simply too idyllic for many not to countenance. If you do decide to become a contractor, you should think of it as launching a business, where the product is you. As with most businesses and entrepreneurial ventures, you will need to front-load the work to get everything in place. However, once you get past a certain threshold, everything becomes much easier. Once you have regular clients, are building your skill set, and are earning good money, life becomes a lot more enjoyable, particularly since you’re your own boss and are free to work from anywhere, for anyone, at any time.
If you've decided to take the leap and become a contractor, then why not join the wellpaid.io community? It's a place to meet fellow professionals, share jobs, and access £1,000s in discounts. Find out more.
Sources and Further Reading