The Benefits of Contract Work

Office of National Statistics estimates from the end of 2014 suggests there are now more than 3.2 million self-employed individuals in the UK. Some are small business owners with retail shops, manufacturing operations or professional offices. Many of them are contractors earning a good living by providing certain products or services to clients under set terms.

Contracting can be an extremely profitable way to make a living. However, contractors also have business responsibilities that cover everything from revenue reporting to taxation. Because the contractor is essentially a self-employed businessperson, any activity conducted under an umbrella company or through a limited company must be properly reported to the government.

i-CAS helps contractors make the most of their business opportunities by providing sound and reliable financial services. We are an experienced accountancy firm capable of offering you clear, concise, and helpful advice about starting your new business as a contractor. We can explain the differences between limited and umbrella companies, and how these affect your status as a contractor or freelancer. The following is a brief explanation to get you pointed in the right direction.

Definition of a Contractor

A contractor is defined as an individual who is self-employed to provide goods or services to persons or businesses for a specific amount of time or for a particular project. Terms of ’employment’ are determined by the contract agreed to by both the contractor and client. Some contractors are paid by the hour; others are paid a lump sum in exchange for completion of the contract.

This type of arrangement allows the individual to offer services or products to clients within a set of limited terms. This benefits the contractor by allowing him/her to determine how and when he/she will work; the client benefits by having access to the needed goods or services under a controlled contract.

Benefits of Contract Work

Working as a contractor is not for everyone. However, for those who like the idea of being the boss, there is no substitute for self-employment contract work. Working as a contractor offers an extensive list of benefits unavailable to salaried workers. The benefits of contract work include the following:

  • Contractors earn more than salaried workers do. As a contractor, you could potentially double your pay if you have an in-demand skill set your clients need.
  • Contractors paid by the hour can increase their earnings further when overtime is involved.
  • Contractors who establish limited companies can achieve take-home pay of up to 80% of total revenues with proper accounting practices.
  • Establishing a limited company offers tax advantages that can reduce the contractor’s total tax liability.
  • Tax bills for contractors can be further reduced by claiming certain expenses related to fulfilling contracts.
  • Contract work is flexible work; the contractor can choose when, where and how long he/she wants to work.
  • Scheduling contracts is up to the individual worker, so holidays and family time are never an issue.
  • Contract work allows for negotiating on every job; contractors are not locked into one way of doing things.
  • Contractors gain invaluable experience that enhances their skill sets with every new contract.
  • Contractors have control over their career paths, charting it in whatever direction they wish.

There are many more benefits to contract work. Perhaps the most important is the ability to control every aspect of what you do for a living. The satisfaction of a job well done is incomparable as a contractor.

Legal Options for Contractors

Anyone considering working as a contractor needs to understand that there are certain legal obligations in terms of income reporting, accounting and taxation. The government is very strict in this regard, so getting it wrong could mean a substantial tax liability accompanied by fees and penalties. How you establish your business dictates what your responsibilities will be.

Establishing a Limited Company

The traditional means of contracting is to establish a limited company. Under this arrangement, the contractor is responsible for every aspect of his or her business. This includes accounting and taxation. The contractor must file all paperwork as well as meet the other mandates of government. In terms of day-to-day work, the contractor is in control of every aspect. He/she negotiates pay, agrees to contract terms, and provides goods and services, according to those terms.

The main advantages of establishing a limited company are business efficiency and a lower tax burden. Greater business efficiency is achieved because the contractor can structure his/her business around his/her needs, schedule, and lifestyle. A lower tax burden is the result of the contractor being able to avoid paying tax on that portion of revenues that go to covering business expenses.

Working under an Umbrella Company

While establishing a limited company offers the greatest flexibility and the highest potential take-home pay, it does involve quite a bit of administrative work. Some contractors forgo forming a limited company in favour of working for an umbrella company.

An umbrella company is an agency that acts as the main contractor for clients. Workers act as subcontractors underneath the umbrella. The main advantage of this arrangement is that the contractor does not have to deal with the administrative portion of the business. He or she can merely provide the work necessary to fulfil job assignments. The umbrella company takes care of dealing with clients including billing and paying individual workers.

When a contractor works under an umbrella company, he or she is legally an employee of that company. Workers fill out time sheets, submit expense reports, and rely on the umbrella company to process weekly pay. Under this model as a higher rate tax payer, the contractor earns upwards of 65% of the contract value as take-home pay. Under a limited company, contractors could take home as much is 85%.

Other Considerations

i-CAS can sit down with you and go through the details of establishing your business as a contractor. There is a lot to consider. For example, contractors have to look at IR35 legislation that defines the legal status of a contractor. We strongly recommend new contractors undergo an IR35 status check to ensure that they meet the legal requirements of a self-employed contractor. The status check is fast and easy to complete.

The other thing to consider is the actual process of setting up a limited company. Should you choose to go this route, there is some paperwork that needs to be filed. i-CAS can set up your limited company for you, free of charge, if you select us as your accountancy firm.

Working as a contractor is your opportunity to be fully in charge of every aspect of your career. With the help of an accountancy firm such as i-CAS, you can earn an excellent living while enjoying flexibility, freedom and a lower tax burden. We invite you to get in touch with us for more information about our services or contracting in general.