31 Mar 2016
Guide to Becoming a Contractor
Many professionals are now considering contracting at some point in their career. The numerous benefits afforded by this way of working include flexible working environments, tax break benefits, and increased compensation. There are however also a number of considerations to take into account before accepting work on a contract basis.
Whilst millions of candidates around the world have already made the leap into contracting, newcomers are still relatively naive when it comes to understanding the various administrative hoops they need to jump through before commencing this new line of work. Let’s take a look at the most important aspects to consider before starting work as a contractor…
1. Your right to work in the country
You will need to provide your agency with information pertaining to your right to work in the country.
If you’re utilising the expertise of an agency, you will need to provide them with the required documentation to either prove you are entitled to work in your country of choice, or to assist with a work permit or visa application.
It is also important to research the process associated with different countries when it comes to applying for a visa or work permit. Some countries have a straightforward process whereas others can be very drawn out. Try to apply for the right to work as far in advance as possible.
2. Compliant solutions for getting paid
There are a number of different options for candidates in regards to getting paid as a contractor. You need to know the differences between them all, and choose the option that will ensure you are compliant with any tax or payment laws, and will also suit your circumstances.
If you are not compliant, you will put your client, agency, and yourself at risk.
The four main options for compliant payment solutions are:
- An Umbrella Company: Popular with new contractors. This gives you flexibility and removes the burden of handling your own taxes. This is a UK-only option and is rarely used abroad.
- A Limited Company: Good for payment options when working as a contractor although it involves more administrative work than an umbrella company.
- A Management Company: Usually a solution offered outside of the UK and supports contractors in facilitating local registration, tax, and social contribution compliance. The benefit of utilising a Management Company is local experience and knowledge.
- A Freelancer: A common solution for individuals working in Europe who are specifically tax registered, operating on a freelance basis.
In the UK, Employment Business’ are required to report all payments made to their workers on a quarterly basis to the HMRC, therefore agencies will require full compliance in every location or jurisdiction.
Research the best option for you to ensure you are compliant from the beginning and avoid any unwelcome charges.
3. Understanding tax
Tax is one of the most complex aspects of becoming a contractor, especially if you are looking to move and work overseas.
In the UK there are a number of different taxes that freelancers need to be aware of, including:
- Corporation tax
- Tax on dividends
- National Insurance
- VAT (only if your business is VAT registered)
As of 6th April 2016 new legislation affecting travel and subsistence of temporary workers will come into effect, meaning UK contractors engaged via an umbrella solution will need to educate themselves on these changes, as they will affect net take-home pay. Understanding IR35 is also essential for all contractors who manage their own Limited Company as a method of contracting – information can be found on the HMRC website.
Taxes also differ depending on the country. In Australia, the tax year runs from 1st July to 30th June and you will be required to pay state payroll tax. In Switzerland tax returns must be filed at the end of March; Switzerland also has four different types of tax: federal tax, cantonal tax, local tax and wealth tax, and there are different tax levels.
It is essential that you understand the different tax rules and regulations that apply to you when considering contracting in the UK or abroad.
4. Know the admin
Contracting naturally involves more admin and paperwork than traditional employment. Some of the most common forms of admin to be aware of, no matter where you are based are:
- Paperwork: Passport, visas, references, proof of identity and address. Credit checks and criminal checks may be required, so be sure to have everything in place before your service commences.
- Timesheets: Contractors are usually required to fill in timesheets detailing the work done that week or month. These will usually need to be signed off by a manager and may be online or in paper form.
- Invoices: These usually accompany a timesheet and will detail the amount owed for the work and services performed. Payment times may differ between agencies and countries so be aware of handing in timesheets and invoices on time.
- Bank accounts: A new bank account might need to be created for your contracting business in order to accept payment from your hirer or agency. This may require you to choose the best business bank account for your company, but also the country in which you choose to work.
- Contracts: These may vary dependent on your working location and solution set up. You need to ensure that you are aware of the potential regulations and requirements for the location you will be working in.
- Expenses: These may need to be signed off in advance and as a contractor you will need to get used to keeping all receipts for approval. This can prove problematic if managers are based in different locations or different time-zones.
- Insurances: Agencies will require you to hold a level of insurance cover for the duration of your assignment, the most common insurance that is required is Professional Indemnity Insurance.
- Sickness and holiday pay: Contractors will traditionally not be paid for sick days or holiday leave so will need to set aside a portion of their earnings to account for these times.
5. Soft skills you need
The below are examples of highly desirable traits in contract workers:
- Flexibility: You must be able to settle in and gel with the existing team. You need to be positive and always keep in mind that your client may be an important reference further down the line.
- Adaptability: You will need to be able to adapt to different working environments and cultures and embrace subtle differences between clients, companies, working hours, break times, punctuality and so on. These will all differ between contracts.
- Ability to build trust: If working from home or seeking to work from home, a contractor has to be able to build trust and demonstrate their abilities so that the client feels comfortable allowing you to operate outside the office.
- Hitting the ground running: As a contractor, you will be paid more because you are expected to be able to do the job already and therefore require little training. You should be able to start work immediately and add value from day one; this includes being able to train colleagues and aid in up-skilling and mentoring other members of staff.
- Ability to build a network: As a contractor, it is essential that you are able to form positive relationships for reference purposes. Having a strong network of references will only help to increase the longevity of your business. This also applies to forming positive relationships with agencies.
If you’re considering a career move into contract work, or are seeking your next contract position, submit your CV today.