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Five things to consider when becoming an IT contractor

Posted by Ross Bramble on Sep 6th, 2019 | Becoming self-employed

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Leaving a steady job to become an IT contractor – or an IT consultant – can be nerve-wracking. As with anything, though, there’s plenty you can do before you become a contractor that can help make the transition a little easier.

So if you’re ready to go it alone, but aren’t sure exactly where to begin, here are five things you need to consider before you become a freelance IT contractor or consultant.

Don’t forget to download our free “How to become a contractor” guide, which covers all of these topics and more. Download the guide and keep it to read whenever and wherever you need it!

1. A financial safety net

Let’s face it – the main thing that holds people back from going self-employed is the initial financial uncertainty. You could be surrounded by self-employed people who all seem to have more customers than they can handle, but when the time comes to make that leap yourself, you start to get cold feet.

The best advice you’ll ever get before going self-employed is to build up a decent financial safety net – we’re talking a nest egg that can cover up to three or four months of your most pressing expenses, like rent, food, and utility bills.

This should be a long enough timeframe to not only get your new IT contracting venture up and running, but also to cover yourself if things don’t go to plan. Becoming a contractor is a risk worth taking, but you need to prepare for the worst-case scenario.

2. Consultant or contractor?

You might’ve noticed we’ve not settled on either term so far during this article; that’s because the difference between an IT consultant and an IT contractor runs a little deeper than simple semantics.

A consultant will be more readily sought by a company looking for a quick and immediate fix, whereas a contractor will be a longer-term investment. A consultant will often come in as an advisor of sorts, make a judgement on what work needs to be performed, and then go about delivering that solution. A contractor is more likely to get their hands dirty, to be instructed by their client on exactly what they want, and then be tasked with delivering it. They may well take up an advisory role, too, but their main duty will be delivering the work.

The title you choose can have an impact on the kind of fees you can negotiate and/or command, too. If you need some more guidance on this topic, you can check out our “Do you call yourself a consultant or a contractor (and why does it matter)?” article.

The distinction is also important in establishing your employment status and whether you’ll be affected by IR35 rules. This is a complex area and the government is introducing new rules from April 2020, which means your end-clients are responsible for deciding whether your contract is one of employment or self-employment. This also affects how any employment taxes due are deducted. You can read more about these new IR35 rules and how they might affect you in our article.

3. Sole trader or limited company?

Settling on the business structure that’s best for you isn’t as tricky as it may seem. It’s a case of weighing up the kind of business you expect to be running, and then matching the business structure to it.

A limited company is a separate legal entity to you – that means that, even if you’re a one-person business, you and your business are separate from one another. You’ll be the director of your company, and you’ll be in charge of making all of the important business decisions on behalf of the company.

Your company, however, has its own assets and liabilities that are completely separate from your own – it pays your wages and/or dividends, and should it all go belly-up, your creditors will recover any monies due from your limited company, rather than from your own pocket.

Many larger companies and recruitment agencies prefer to only work with IT consultants who operate as a limited company, and if you’re likely to be making more than about £35,000 in profit, you’ll probably pay less in tax and National Insurance.

As a sole trader, you and your business are one and the same. You can keep all of your business’ profits after you’ve paid tax on them, but you’re also responsible for any losses your business makes.

Whether you choose to be a sole trader or a limited company, you’ll have to inform HMRC (and Companies House if you’re setting up a limited company) so you can file your annual Self Assessment and, if necessary, register for company taxes and register for VAT.

If you need more support with deciding which business structure is best for you, check out our “Sole trader vs limited company, or umbrella: what’s best for you?” article for more information.

Business expenses guide

4. Settling on your rates

If you’re new to the IT consultancy or IT contracting business, you might not know what the going rate is for someone in your sector. Of course, you don’t want to undercut yourself with your rates, nor do you want to price yourself out of clients early doors. What to do?

Part of this will come down to whether you choose to be a consultant or a contractor, but there are still a number of ways to decide what kind of rate you want to charge your clients.

One way to start is by deciding how much you want to earn a year, and working backwards from there. Let’s say you’ve got a year of experience under your belt and would like to take home a salary of £50,000. You’ll be looking to work for 225 days of the year, discounting weekends and 28 days holiday per annum. Your simple day rate is £222.22 (£50,000/225 working days).

You can continue to break down the numbers to identify an hourly rate, if you’d prefer, or you could base your charge on how much you want to bring in per month, and then work towards that target. The important thing to remember, especially at the beginning, is to be prepared to negotiate. Once you’re established and your reputation speaks for itself, you’ll be able to settle on a stricter rate if you’d prefer.

Another option is to find out what the going rate is – we have a Day Rate Calculator tool that shows the average rate both nationally and regionally. This can be helpful if you’re not sure what is standard. You can also try asking around any other contractors you may know – though not everyone is comfortable sharing this sort of information!

5. Finding your first client

Your first client is often the hardest client you’ll ever have to find. As your business starts to gain a reputation and the testimonies and reviews begin to pile up, you’ll find work a lot easier to come by.

You can break down the key steps you need to take to find and secure new clients and contractor gigs into three easy steps:

  • Initial preparation – things to do or consider upfront before you start applying for gigs
  • Daily activity – things to do each day as you hunt for another contract
  • Role-specific activity – things to do for specific gigs you’ve applied for.

You can read our entire breakdown in our “Find your perfect gig: The ultimate contractor job hunt checklist” article. You don’t need to do everything on the list – use this as a starting point and do the things are relevant to you and your circumstances. You can also check out our guide to landing your dream contractor gig with the ultimate contractor CV article for all the details and a complete breakdown of what goes into the perfect CV.

The six degrees of separation theory suggests you’re only ever six or fewer steps away (by introduction, of course) from any other person in the world, so when the time comes to find your first client, ask around. Tell your friends you’re looking for work, and browse LinkedIn. Build up your contacts and use them to your advantage.

Another great way to get the word out about your new business venture is to attend networking events. They’re the perfect environment to pitch your business and your skills to like-minded folk who could become customers, business partners, or helpful friends able to point you in the direction of work.

Make sure you’ve got a pen, a notebook, your phone, and some business cards on you at all times, too. You never want to get caught on the hop when someone offers you their information, or when they ask for yours.

Recruitment agencies

Recruitment agencies are another route you can explore in your hunt for work. The benefits of recruitment agencies are clear: they have access to thousands of jobs and, often, contacts with thousands more employers and companies. The chances of finding work will naturally improve when the pool of possible employment opportunities is as large as that.

However, recruiters won’t help you for free, and could charge anywhere between 10% and 25% in commission fees. They may also continue to take a commission fee if you go on to do more work for the company they put you in contact with, arguing that the opportunity wouldn’t have been available to you had they not first put you in touch.

One of our Crunch IT contractor clients, Tadas Tamosauskas, offers the following advice on dealing with recruiters:

“Recruiters will email you with vague information about positions for unidentifiable clients. Sometimes they will ask you to sign an agreement that you will not try to circumvent them and reach out to the client directly. Don’t sign anything. Ask what companies are they recruiting for. If they are not willing to disclose the company names, chances are they’ve just [crawled LinkedIn for positions] and are not working for their ‘clients’. They are merely forwarding your CV to random companies. Try to avoid this kind of recruitment agents if possible. Employers do not like dealing with this type of recruiter either.”

Bonus tip: Get an accountant

Now, you might be thinking, “Of course they’d say that – they’re accountants”, but hear us out.

Going it alone doesn’t mean you should be on your own, and that’s why having an accountant on your side who’s walked this path with dozens of clients before is invaluable.

They’ll remind you of important tax dates and when certain payments are due, show you ways of keeping your accounts in excellent shape, advise you on allowable expenses and how to report them so you’re as tax efficient as possible.

They can help you with things like estimating how much tax and NI you’ll need to pay every six months, or quarterly for VAT. They’ll also help to ensure you’re no forgetting a payment on account, which catches many people out every year. A good accountant is there to ease your worries, not to add to them, after all.

Find out more about how Crunch’s online accountancy platform supports start-ups, whether you’re a sole trader or a limited company, and discover how we can help your new business venture succeed.

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