What is contracting?

Contractors are people who work for their clients for a limited amount of time or on a project basis, usually with a contract for services they offer. Contractors generally charge their clients by the hour or offer a day rate; which is normally significantly more than the rate earnt by comparable employees of the client. This is one of the star attractions of becoming a contractor.

Contractors opposed to employees of a client have certain traits; for example they are not working under the supervision, direction or control of the client and so are free to negotiate their own terms for each assignment with the client and they tend to have more freedom and flexibility than an employee would. Conversely they don’t get the benefits an employee would from the client if any, nor would they get holidays or sick pay from a client for example.

Key Responsibilities

As a Contractor you have additional administration responsibilities that you would not generally have as an employee. These additional responsibilities include the need to invoice for the services you perform, collect payment, manage Payroll and VAT compliance if appropriate; and the need to account for income and expenses you incur producing accounts and tax returns for filings at HMRC and Companies House if appropriate.

The medium by which you operate, namely via your own Personal Service Company, or an Umbrella Company or by being a Self Employed individual are choices you will need to make and each has differing levels of responsibility, disclosure and each yield differing amounts of return to you. Selecting the medium by which to operate is a commercial decision influenced by your expectations and your personal goals and objectives.

Pros & Cons of contracting


  • Contractors negotiate their rate of pay with clients and thereby usually achieve more than an employee of the client would. In negotiations with a client a higher rate is often achieved to compensate for several factors including the following: no job security, no employee benefits, no holiday pay, employers NIC payable saved by the client and no statutory pay for sick leave, maternity or paternity for example.
  • Being paid for all time spent if agreed.
  • Freedom and flexibility to negotiate your work hours and days
  • Ability to delegate work to others to discharge your responsibilities
  • Assisting businesses by provision of a flexible workforce that Contractors fulfil


  • Contractors have contracts which will end after a period of time and so you would need to organise your next contract whereas in employment there usually is no immediate end date, although all employment and jobs are never 100% secure.
  • Contractors do not have a fixed location of work opposed to most employees
  • IR35 legislation – you must comply with tax legislation and be able to demonstrate that you are not a disguised employee if you are taking contracts through a limited company. If you are subject to the IR35 rules you may have to assess your company’s income as deemed employment income and pay PAYE/NIC tax on it.

£85 pm

Limited Company contractor

add-ons available
all prices + VAT

£39 pm

Self Employed

add-ons available
all prices + VAT

How can we help ?

A Chartered Tax Advisor and/or a Chartered Accountant will take look at your figures and will discuss generally the financial impact of the various options available to you. This will assist you in making decisions about the business medium you may wish to consider to achieve both your commercial and personal goals.

Contact us to arrange an appointment to talk to one of our Qualified Accountants.

How do the different set up mediums work?

As a contractor, you would be receiving income from different clients and there are different ways you can set yourself up when contracting:

You can set up and register a limited company which is a separate legal entity to run your business through. As a separate legal entity the company can earn income, have expenses, pay corporation tax, have assets and liabilities and can pay dividends from distributable profits to its shareholders.

You would raise sales invoices from your company to the clients which your company provides services to and they would pay your company. earn a salary from the company as a Director and receive dividends from the company as a shareholder where these are declared. As a Shareholder you may pay personal tax on dividends received in excess of the dividend allowance. Please see our tax rates for details.

Benefits of taking dividends is that they are not subject to National Insurance Contributions and you can take them when you want provided the Company has distributable profits to make them from. You can also very usefully restrict the amount you take by leaving profits in the Company.

Running a company also comes with responsibilities, for example you must ensure you file your company’s annual accounts, file corporation tax returns, check to see if you need to be VAT registered and if you run payroll, ensure you follow the RTI rules and regulations. You must also keep full records of your company’s activity and hold those records for at least 6 to 7 years for HMRC purposes. We can also incorporate your company for free as part of our fixed fee monthly package, this is another super benefit from us.

Contact us to discuss the options you have and what accounting and tax issues you should consider when starting out as a contractor.

If you are just starting out as a contractor or have low earnings  and not sure if you want to do this for a long time, it might be better to earn your income as a self-employed individual. You can change to a Limited Company if you prefer at a later date.

As a self-employed individual you pay Income Tax and National Insurance Contributions on your profits after available personal allowances please see the tax rates.

Contact us to discuss the options you have and what accounting and tax issues you should consider when starting out as a contractor.

Working through an umbrella company takes away the responsibilities of running your own company as the Umbrella Company acts as an employer where they collect your earned income from the Client you are working with and then, deduct your income tax and national insurance and Umbrella administration fees and pay you the net amount as a salary.

This is ideal for temporary workers as it doesn’t require any planning and it’s easy to use. Once you have established your long term goals you can then consider a limited company option which may be better suited to your personal needs.

During the period of using an umbrella company, you do lose out on the cost the umbrella company charges you than if you were directly employed, so makes it the most expensive option.

There is less freedom as the Umbrella Company acts on your behalf rather than you dealing with the company you work for directly.

Contact us to discuss the options you have and what accounting and tax issues you should consider when starting out as a contractor.


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