A first-time contactor’s guide to setting up compliantly to start UK contracting

It’s no secret that working habits have evolved far beyond what they once were. Since 2020, we have seen a significant spike in people taking the leap and opting to work as contractors.

While this is a fantastic opportunity to take control of your career, it doesn’t come without challenges, writes Alan Lowdell, finance manager at Matchtech, a leading STEM recruitment partner.

So what does it mean to work as a contractor in 2023 from a compliance standpoint, if you’re new to contracting? Here, exclusively for ContractorUK, I’ll breaks down some of the key legislation to provide a first-time contractor’s guide to setting up compliantly.

You’re going to be in good company…

In recent years, the number of ‘off-payroll’ workers in the UK has continued to grow. According to the Office for National Statistics (ONS), there were approximately 4.95 million self-employed people in the UK in 2020, representing around 15% of the total workforce.

For some, becoming a contractor is the best decision they will ever make. But, before you get caught out thinking the grass is greener on the other side, there are some things to consider before taking that all-important leap of faith – and that’s before we get to the compliance hurdles!

Mindset and motivation

Over the years, the contracting market has become increasingly competitive, meaning your mindset and motivations play a pivotal role in success.

Moving from permanent employment to contracting requires more thorough consideration. Whether you are looking to achieve a better work-life balance or enhance your skills, you should ensure you are making the right decision for your current circumstances, and future career development.

Besides the technical know-how, do you have the all-important ‘soft skills’ to back it up?

With digitisation continuing to evolve our working habits, candidates should be receptive to change; willing to learn and adapt to the ever-changing landscape.

Close-up on the technology sector

Take IT for example. Gone were the days IT workers sat quietly in the corner. Now, they are the driving force behind many organisations, guiding them through digital transformations and protecting sensitive data.

In thinking about your motivations, you should also consider the impact on your lifestyle. It is easy to focus on the financial reward and flexibility but what about the practicalities?

Depending on the location and length of the contract, you may find yourself having to adapt your lifestyle to accommodate commuting, time away from home, the financial cost, and what impact that all has on home life, particularly if you have a family.

Legal structures as a contractor

Now, you’ve got your mindset and logistics sorted, it’s time for compliance – and first off, it’s deciding on the legal structure for how you want to work as a contractor.

From operating as a sole trader to supplying services as a limited company, there are more than a couple of options available in the UK to begin contracting as a contract or freelance professional.

But be aware! Each comes with its own advantages and considerations regarding tax, liability, and administrative requirements.

Regardless of which model you choose, you’ll benefit from greater control over your future, what projects you support, and even potentially how much you charge for your expertise (notably when you engage on a direct-to-client basis).

1. Sole trader

As a sole trader, taxation is considered much simpler compared to other business structures as you are only required to register for a self-assessment with HMRC, and then file a yearly tax return reporting income and expenses.

However, there are some notable drawbacks to becoming a sole trader.

Firstly, you will have unlimited personal liability, meaning your personal assets are at risk if you encounter financial difficulties or legal issues.

Sole traders are also perceived as less credible or established than limited companies, therefore many employers and recruitment agencies will not engage with sole traders, limiting your options for finding new work or a range of projects.

In addition, under the Income Tax (Earnings and Pensions) Act 2003, engaging with sole traders may result in agencies having to ensure PAYE and National Insurance are deducted from payments.

2. Limited company

If you set up as a limited company (often abbreviated to ‘Ltd’), and appoint yourself as the director and shareholder, your personal assets are generally separate from company liabilities, meaning less financial risk for you as an individual.

Operating as a limited company also enhances professional credibility which provides more growth opportunities.

However, you should note that when entering a contract, there may be negotiations to be had. In most cases, the end-client will be responsible for determining the employment status of the worker – that’s you. But for smaller clients that fall outside the public sector, you will be responsible for deciding employment status and if the so-called IR35 rules apply.

Unfortunately, operating as a limited company may involve more administrative responsibilities.

Besides complying with quite a lot of regulations, you are required to file annual accounts and returns with Companies House and maintain proper company records. You’ll also have duties to fulfil as director.

Versus being a sole trader, it can also be more expensive to set up and run your business if it’s incorporated (i.e. a limited company), as you will be responsible for company registration fees, accounting services, and potentially higher insurance premiums. There are also ongoing costs to consider associated with compliance and reporting.

3. Umbrella company

Alternatively, you could opt to work as a contractor via an umbrella company.

By joining an umbrella company, you become an employee of the umbrella company rather than operating as truly independent as you would if you’re a sole trader or limited company. This means the umbrella company handles most administrative tasks, including invoicing, payroll, and your tax calculations.

Most employers and agencies will only engage umbrella workers if they have been through vetting to ensure compliance, and so tend to insist on their own ‘brollies’ as a result.

In our case, we have an approved list of umbrella companies that have passed an in-depth due diligence process and our agency will not work with umbrella companies outside of this list (known as a PSL, ‘Preferred Supplier List’).

You should also be aware that umbrella companies are unregulated, but a government consultation has launched in this area and is seeking views until August 29th 2023.

4. PAYE via agency

The final option for off-payroll working (although it is not offered by all agencies) is to work as a PAYE contractor via a recruitment agency, under a contract for services. This offers the same broad benefits and drawbacks as working via an umbrella company.

Lastly, don’t skim…

In terms of what structure YOU should choose, it’s very much a case of ‘horses for courses.’ From that point onwards, and even before you’ve settled on your preferred contracting structure, the path to becoming a contractor can be challenging.

Yet as most contractors will tell you -- being a contractor can be incredibly lucrative and rewarding. It pays dividends to understand lifestyle impacts, compliance and legal structures however, so don’t skim over these initially fundamental steps to professional freelance contracting.

Wednesday 12th Jul 2023
Profile picture for user Alan Lowdell

Written by Alan Lowdell

With over 45 years of experience in finance, of which nearly 20 years have been in the recruitment sector Alan has gained a deep understanding of various industries including transport, logistics, recruitment agency, construction, technology and engineering. Throughout his seven years with Matchtech, Alan has led the UK-based transactional finance teams and is responsible for all pay and bill.

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