By Lynne Gowers on 12th July 2016

Contracting – your business options

Job dissatisfaction and lack of work-life balance are just a couple of the reasons why people turn away from conventional employment and step into the world of contracting.
Working as a contractor, freelancer or locum worker offers freedom and flexibility, you can pick and choose the jobs you want, pay rates tend to be higher and working life is varied. In fact studies show that contractors are happier and more fulfilled in their jobs than workers in permanent roles.
If you have chosen to make the leap we have put together the most important things to know when you start out contracting.


Starting out

Contracting is sort of a halfway house between being a traditional employee and an all-out freelancer. You can be contracted as yourself, through your own company, or through an agency.

Contracting is a good choice for you if you don’t like being stuck in one place and if you can easily hit the ground running with new teams and working environments. It’s also a great way of broadening your experience and improving your prospects.

On the flip-side, contracting can mean a lack of security and employment perks. You are also responsible for managing your finances and finding your own work, which requires organisation and perseverance.

If you still think contracting is for you – read on!

Your business structure

Considering how you are going to work as a contractor is one of the first, and most important, decisions you have to make when starting out.

These are the main options:

  • Limited company

This is a legal entity which you can set up to run your business. The legal and financial affairs of the company are kept separate from your own. This means if your company goes into liquidation, your personal finances and assets can’t be claimed unless you have given any personal guarantees or are accused of wrongful trading. Operating as a limited company you pay Corporation tax on the company’s profits and can pay yourself through a combination of dividends and salary. You can also claim certain business expenses through your limited company, which will minimise the company’s tax.

Accountants like Boox can help with the administration that comes with running a limited company. Find out more.

  • Sole trader

You are self employed and run your business as an individual.  While you still have to do a self assessment tax return, there is less paperwork than with running a limited company and your accounts and record keeping will be simpler. (Ask about our dedicated sole-trader service).

  • Umbrella Company

Umbrella companies act as an intermediary between contractors and their recruitment agency or end client. You become their employee and they take care of your tax and NI, pay you holiday pay and other employee benefits. It’s a good choice if you want the flexibility of contracting but don’t want the administrative hassle of running your own business.

Setting your rates

One of the trickiest aspects of working for yourself is knowing what to charge people. Here it pays to do your research. Check competitor websites and industry forums. You could even do some “secret-shopping” and ring round for quotes.
Always ask clients what their budget is before you get round to discussing rates, that will give you an idea of where to pitch.
Don’t be tempted to undercut the competition, especially when starting out. This can have the negative effect of devaluing your service, or being perceived as cheap.


This is a term you will hear bandied around in contracting circles. IR35 is basically a piece of government legislation to stop people using contracting through limited companies as a way to avoid tax. If your contract is caught by IR35, you need to operate “deemed payments” which involves paying PAYE tax and NI on the majority of your income.

It is worth closely considering your business practices to ensure you stay outside of IR35. Click here for advice on this.

From April 2017 for people contracting in the public sector, the decision whether the contract is caught by IR35 has been taken out of the contractor’s hands, and is instead determined by the public sector body.

Finding work

When you start out contracting, explore every source of work available to you. Hit the jobs boards and online contractor communities, speak to recruitment agencies and pick up the phone to potential clients.
Basically put yourself out there!

Dealing with clients

Happy client relationships are profitable ones!
Talk to your client from the very outset of the job, make sure you understand what you are being contracted to do and what the client’s expectation of the final result is.
Remember that they are bringing you in for expertise they lack, so don’t be afraid to explain and justify what you are doing throughout the duration of the contract.


Once you start invoicing over the VAT threshold, you’ll need to register for VAT and start collecting VAT on your invoices. You can off-set this on the VAT you pay on your business purchases and then pay the difference to HMRC every quarter (or different period depending on how you register).
You can choose to register for VAT on a voluntarily basis before you reach the VAT threshold.
You can also choose to register under the VAT flat-rate scheme. Find out more about this here.


We can’t stress enough the importance of keeping well-ordered accounts and financial records when you are contracting. Not only does this save you a world of pain at the end of the financial year, it means you don’t take your eye off the ball with what is going in and out of your business.


Written by Lynne Gowers
Disclaimer Although we attempt to ensure that the Information contained in this publication is accurate and up-to-date at the date of publication it may not be comprehensive, we accept no liability for the results of any action taken on the basis of the information they contain and any implied warranties, including but not limited to the implied warranties of satisfactory quality, fitness for a particular purpose, non-infringement and accuracy are excluded to the extent that they may be excluded as a matter of law.

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