Life as a contractor: the good, the bad and the ugly

No matter how much you dream of setting up on your own, trading in the security of your PAYE job to become a limited company contractor is still a big decision, writes Bivek Sharma, head of KPMG Small Business Accounting.

But if you’ve been harbouring thoughts of becoming a contractor, now could be the perfect time. The result of the EU referendum has introduced an unprecedented level of uncertainty into the economy. As a result, many employers are choosing to delay any long-term investment decisions, including recruitment, until the picture becomes clearer.

To mitigate this uncertainty, rather than hiring permanent employees, it is thought some businesses may choose to hire contractors to fill their resource gaps over the shorter-term. This means that for all you aspiring contractors, there are could be more opportunities in your industry than there have been in the last few years.

However, going from having a boss to potentially being your own boss is a major step, not least in terms of tax. To give you the greatest chance of success, here are three essential factors to consider before you jump into life as a contractor, as well as the potential pitfalls to avoid. 

Earning potential

The good – Contractors not only tend to get paid well at source, earning up to 50 percent more than employees in similar positions, but they also have the freedom to decide how they are paid as a PSC. This means they can reduce their tax liability by using a combination of salary and dividends to increase their take-home earnings.

The bad – While contractors typically earn more than their employee counterparts, you are likely to have to do without employment benefits like car allowances, company pension schemes and private health care.

The ugly – As contractors are not taxed at source, it is essential to put money aside every month to contribute towards your tax bill at the end of the year. Fail to do so and you could receive a substantial bill you are unable to pay!


The good – Independent contractors can choose which jobs they take on, which sectors they want to work in and even when they have time off. This freedom allows them to determine the skills they’d like to acquire and the direction their careers take.

The bad – Maintaining a regular flow of work will require some additional effort, such as searching for new contracts before an ongoing contract ends. There’s also no guarantee of work, with the availability of contracting roles often depending on factors outside of a contractor’s control.

The ugly – Finding contract work requires a different approach than searching for a full-time job. The decision to hire a contractor is typically made a week or two before the contractor is needed, and they are normally required to start work ‘yesterday’.

This makes it difficult to ensure a continuous flow of work when moving from one contract to another. For this reason, contractors should always ensure they have money in reserve to cover their expenses while they search for their next role.


The good – In terms of your financial security, the potential extra earning power you’ll have as a contractor will help to improve your financial position. You can also reduce your personal tax liability by up to 25 percent and receive tax relief on pension contributions up to £40,000. 

The bad - There are no employment protection rights for contractors and no holiday pay, no sick pay and no paid maternity or paternity leave. This can leave you in a financial bind, particularly if you fall ill. 

The ugly – If a client thinks a contractor is not up to scratch, or if a project finishes early, the client can simply terminate the contract without giving notice. The result will inevitably be a period of unemployment while you search for your next contract role. Again, making sure you have financial reserves is the only way to ensure you can pay your mortgage and maintain your financial obligations during this time.

Is contracting the life for you?

If you think life as a contractor could be for you, you need to research the market to find out more about the opportunities in your sector and the level of pay you could reasonably expect to receive. You then need to think about how you’ll cope financially during periods of unemployment. Once you’ve decided to give it a go, the next step is to choose whether to set up a limited company or an umbrella company. Good luck!

Editor’s Note: The author, Bivek Sharma, is head of KPMG Small Business Accounting, which provides contractors with a full accounting service, including a quarterly business review with a KMPG consultant.