A freelance contractor is an individual who enters into a fixed-term contract with a third party, either on their own or as an employee of a company to assist in the running or completion of a specific project.
Advantages and Disadvantages of Contracting
There are always two sides to any situation. Listed below are some of the basic pros and cons of becoming a freelance contractor.
This tends to be one of the main reasons why most people consider going contracting. Due to the short term nature of most projects, most employers are prepared to pay substantially higher rates to contractors than to employees. The employer realises savings in not offering benefits such as holiday pay, sick pay, redundancy etc. Also, when operating as a Limited Company Contractor, you can organise your income in a more tax efficient way thus increasing your overall earnings potential.
As a contractor, you have the freedom to change positions on a regular basis without the formality of notice and without your career history suffering as it would if you were a permanent member of staff. Also, operating as a contractor allows you the flexibility to enter into different market sectors thus improve your business and industry knowledge.
Holidays and Travel
As a permanent member of staff, you may only be allowed to take holidays for a certain length of time and at a particular time during the year. As a contractor, you can take extended holidays between contracts and look at opportunities of working overseas and combining travel and work at the same time.
As the contract is only secured for a specified timescale, there is no guarantee that another contract will be available immediately afterwards.
When operating as a freelance contractor, you would receive none of the benefits associated with permanent employment such as holiday pay, sick pay etc.
Additional paperwork and day to day attention to your affairs is required as you are running your own business. It will in most cases be necessary to appoint an accountant, who will inevitably wish to charge you for their services. You will also be responsible for ensuring you have enough money to pay any tax when it falls due.
In summary, there are a number of different factors to consider when deciding to go contracting. During the decision making process, endeavour to determine your real motivations for making the transition. Decide whether your skills are marketable enough to support a long term contracting career. Make sure that it is a decision you will feel comfortable with in the longer term and above all, enjoy it!
How do I set up as a Contractor?
OK, so you have decided to take the plunge and go contracting. There is now the matter of how you will operate as a contractor. There are two main routes which an individual may follow when they have decided to enter the contract marketplace; 1. Umbrella Company 2. Limited Company.
In recent times, the use of an Umbrella company has become more popular.
An umbrella company is a halfway point between the agency employee and Limited Company routes. The Umbrella company is set up and run by a third party (often a firm of accountants). The contractor becomes an employee of the Umbrella company and all invoicing, VAT returns, tax administration, bookkeeping etc are handled outside the control of the contractor. The contractor is then paid a salary and relative dividends in line with their earnings. This concept is directed primarily at short term contracts which may not warrant the set up of a Limited Company and can also be used for contractors thinking of taking up a contract overseas. Additionally, some contractors may use this as a first step to setting up their own company.
The vast majority of contractors follow the route of forming a Limited Company on commencement of their first contract. The advantages and disadvantages are outlined earlier. The contractor forms, or buys a limited company, the limited company then enters into a contract with the agency to provide specific services to a third party and the limited company employs the contractor to perform these services in fulfilment of the contract. The contractor will generally become a director or major shareholder of the newly formed limited company.
Bright Purple have been placing contractors in long and short term contracts for the last four years. The majority of our contractors operate as a Limited Company. There are many administration duties that must be performed, some in line with legislation, during the course of any financial year. Whilst this information is intended as an introductory guide, Bright Purplewould strongly recommend seeking professional advice from the accountancy profession regarding the setting up and running of any Limited Company. There are a number of different firms of accountants who actually specialise in providing a variety of services to existing and first time contractors.
We do hope that you have found this information of some help and please remember that at all times, you should consult with a specialist for the best advice. Those specialists include an Accountant, Financial Adviser, Bank Manager, Insurance Broker and Bright Purple.
Bright Purple will give our commitment and promise to work both with you and on your behalf, in the most professional and ethical manner.