Chapter 1: Understanding contracting
Combine your skills with clear understanding. That’s how you build confidence.
The contracting crossroad
Getting started with contracting can be exciting, but a little daunting too. There are plenty of positive elements that make it all worthwhile, but contracting also comes with its unique challenges. In this chapter, we’ll dig into what contracting is, take an honest look at its benefits and drawbacks, and explore the key factors you’ll need to consider before making the transition.
What contracting means
Contracting is a working arrangement between you and a company, where you provide your skills or services for an agreed assignment, project or period. Your working arrangement matters: you might run your own business, work through your limited company, or be employed by an umbrella company or agency.
The word “contractor” doesn’t decide your legal status. The word “contractor” does not decide your legal status. Depending on the arrangement, you may be self-employed, a worker or an employee. Your rights and tax responsibilities depend on the contract and how the work happens in practice. A fixed-term employment contract is different from a business contract for services.
Why contracting?
Lots of professionals decide to start contracting because of the potential to earn more money, choose their own projects, and enjoy the flexibility it offers. Contracting is also a great way to experience and learn about different industries, companies, and ways of working.
Understanding your benefits
Before leaving permanent employment, check which benefits you’ll have in your new arrangement. Umbrella employees have statutory employment rights, including paid holiday, and eligible workers must be enrolled in a workplace pension. Company benefits, like enhanced sick pay or private medical insurance depend on the employer’s policy.
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Bear in mind that contracts can sometimes last for just a few months or less, so you’ll need to prepare for potential periods without work. If you’re genuinely self-employed, you’ll usually need to allow for unpaid time off and organise your own retirement savings. Build those costs into your rates and budget. If you work through your own company, check your position as both a director, and where applicable, an employee.
The contractor mindset
Successful contractors are often entrepreneurial, adaptable, proactive, and resilient. They’re able to promote their skills effectively, build strong networks, and quickly integrate into new teams. They don’t back away from uncertainty, and are usually prepared for change. Here’s what sets successful contractors apart:
- Entrepreneurial mindset: They view every contract as a mini business venture, approaching each opportunity with the vision of an entrepreneur. This inspires them to invest in their personal growth and update their skills to keep up with industry trends.
- Adaptability: In an environment where change is the only constant, being able to adapt is important. Contractors embrace change, viewing every shift as a chance to learn and innovate.
- Proactivity: Successful contractors don’t wait for opportunities to come their way; they’re always proactive, seeking out new challenges and anticipating market needs.
- Resilience: The contracting world can be unpredictable. Projects might end abruptly, and there can be periods without work. But resilience helps contractors push on and turn setbacks into set-ups for future success.
- Self-promotion: Beyond doing a job well, successful contractors understand the importance of showcasing their achievements and making sure their contributions are recognised.
- Networking skills: A successful contractor knows that their network is their greatest asset, so they’re able to build strong professional connections. This opens the door for new opportunities, and encourages the exchange of knowledge.
- Seamless integration: Every new contract might mean a new team or a different corporate culture. Successful contractors quickly find their feet, encourage collaboration and offer value from the outset.
Contracting costs
Becoming a contractor involves many financial commitments, like compliance with regulations, setting up your business, getting essential tools, marketing your services, and maintaining a work-life balance. This can cost between £2,500 and £12,000 annually. In each chapter, we’ll take a closer look at the financial breakdown of everything you need, so you can plan and manage your finances effectively.
Are you ready?
Before you take the plunge, make sure you analyse your skills, financial situation, and readiness to embrace the lifestyle changes that come with contracting. Also, keep in mind that the path to becoming a successful contractor takes time, so patience is key.
As you make your way through this guide, reflect on the insights shared in this chapter. They’ll provide a solid foundation as we look closely at the transition to contracting, optimising your income, and handling complex tax laws like IR35.
For more resources, like Action Checklists, discounts on services and downloadable guides, read the full The Essential Guide to Contracting here.
