Step By Step UK Contracting Guide

So you still want to start contracting?

As you’re still reading this we’re assuming that what we’ve mentioned so far in our introduction to contracting article has not put you off; so let’s move on and get started with the important information you’ll need to know with our step-by-step guide to a career in contracting.

Step 1 – Research your Market.

First of all don’t go ahead and give up your permanent or part-time job until you are sure that there is a market for your skills as a contractor. Find out if there is a demand for your skillset and where that demand is by contacting specialist contract recruitment agencies. If your skills are in demand, but only in London and you live in Leeds, you’ll need to think about whether you’re happy to relocate.

Gain a better understanding of the current market by talking to other contractors. There are a number of well established forums on the internet, which are perfect for sourcing more detailed information and advice from more experienced contractors.

You’ll also need to think of ways to differentiate yourself from other contractors offering the same skills, be clear what your strengths are before you begin selling yourself to an agent.

You may need to look at retraining to gain additional skills that are required for certain contracts, or in some circumstances you might have to accept a slightly lower rate of pay in order to win a contract that’ll give you additional valuable experience.

These are all things you need to consider carefully before you go ahead and quit your permanent job.

Step 2 – Quitting your Permanent Job.

Most contracts will require you to be available for interview immediately or at least within the next couple of days and then to start normally within the following 2 weeks. Therefore you will need to quit your permanent position and start looking for contracts at the most 4 weeks before you are due to become available.

Step 3 – Searching for a Contract.

Possibly the most time consuming and hardest part of contracting work is finding and then securing a contract. However, with some careful planning and a bit of hard work the process becomes a lot easier.

To begin with you will need to create a plan of action that covers the following areas, which will help to maximise your opportunities:

Search online job boards
Visit contractor newsgroups and chat forums
Personal networking
Contact specialist contractor recruitment agencies.
Read career publications and websites
Check newspaper classifieds

In addition to this you will need to create a professional looking CV, covering letter and reference page. More on this later.

Over time as you build up networks and contacts and a good reputation for high quality work you should find that relevant contracts are much easier to find.

It is worth remembering that employers expect to see a covering letter with your CV, regardless of whether you are applying via post or email. Furthermore, it is always a good idea to send a quick thank you email to the employer following an interview. Although this may seem like a small and insignificant action, it is an important part of job searching etiquette.

Writing the perfect Contracting CV

Your CV is essentially a marketing document attempting to sell a product – you! From the employers perspective they want to know as quickly as possible whether you are right for the position; so you need to tell them why you are perfect for it as concisely as possible.

The person reading your CV wants to see that:

You have the skills they require.
You have previous experience of using those skills.
You understand their requirements and can deliver them.
You have provided similar skills to previous clients.

The most important factor to remember is to ensure that the CV is targeted to the contracting role you are applying for. Many people make the mistake of writing their CV as a life story including every part of their education and employment to date. However this method is just too general and will require the reader to pick out the parts they like and ignore the irrelevant information. Considering that each CV is given about 20 seconds to create an impact, you don’t want to be wasting any of that valuable time with irrelevant information.

So, how do you create a high impact CV?

A good CV will state the following information concisely for the reader:

I have the skills you require.
I know what goals you are trying to achieve.
I have used the skills before to achieve similar goals for other clients
I am perfect for the role.

By ensuring this information is provided you will drastically improve your chances of securing an interview.

As we’ve mentioned above you have roughly about 20 seconds in which to create an impact on the reader. It is unlikely that they will get to the second page within the 20 seconds so you need to ensure that everything required to satisfy them is included on the first page.

The first page should be structured as follows:

Personal Profile – this is your opportunity to convince them that you are exactly what they are looking for.
Expertise / Skills – summarise your skills so that at a glance they can see that you have the skills they’re looking for.
Achievements – Use this section to show evidence that you have experience of doing the same or very similar work for other clients.

For an explanation on exactly what to include in these sections please read writing a killer CV available on the IR35calc.co.uk website.

Crafting the Covering Letter

The covering letter is a perfect opportunity to highlight your core skills and persuade the employer that you are the right person for the job.

Starting your Search with Online Job Boards…

The internet is full of online job boards that you can use when searching for your contract. The bigger and better job boards include:

There are a lot of smaller niche online job boards (which are possibly more specialised), so do some research to make sure you find and use the best ones for your specific sector.

It is important not to put your CV on these job boards and just leave it there; it needs to be constantly updated and refreshed. This gives your CV a new posting date which in turn means it is likely to get more attention from HR managers and recruiters.

It is a good idea to adapt your CV to broaden its reach on job boards. Many recruiters search on keywords, so it is wise to make sure you include as many relevant industry buzzwords as possible, in order to maximise your hit rate.

Recruitment Agencies

It is recommended that you select about 4-5 good recruitment agencies, with a mixture of large general agencies and a few smaller ones specialising in your field.

Speak to friends and colleagues and see which recruitment agencies they recommend. You will get an honest opinion through word of mouth. It’s a good idea to check that the agency is registered with The Recruitment and Employment Confederation (REC), who are the regulators of the agency marketplace.

Once you have short listed a few agencies you will want to speak to them. From this you should get an idea of how well they are going to work for you:

Do they create a good impression when you speak to them? If they can’t impress you then they are unlikely to impress employers.

Do they understand what you are looking for? Do they understand your market? If they don’t then you will end up getting information on irrelevant vacancies, which will just end up wasting their time and yours.

Are they willing to meet to discuss your requirements? This is important because they will only really understand who you are and what you’re looking for with a face to face meeting.

Do they guarantee not to send your CV without permission? You need to ensure that any agency you join is not going to send out your CV without your permission.

Do they keep you updated? A good agency will keep you updated on all the vacancies they have put you forward for, as well as keeping you posted on new opportunities that might be relevant to you.

Build strong relationships with your agencies

It is vitally important to build strong relationships with one person at each agency. Make an effort to get to know them and remember to call them regularly so that you stay at the forefront of their mind. That way when a relevant position becomes available you’ll be sure to get a phone call.

Working Direct

In addition to working with agencies and checking online job boards, it is advisable to monitor the websites of those specific companies that you wish to target. Jobs are often listed there that are not posted anywhere else.

There are a number of benefits of finding work direct with a client. It is likely to help your IR35 status (see Determining your IR35 status) and you might even be able to negotiate a better rate, as they will not have to pay agency commission.

Remember to always follow up

It’s a good idea to keep a record of all the jobs you apply for, and devise a simple method of following up.

It is recommended that you follow up on all applications within 7-10 days if you have not had a response. It can also be beneficial to follow up before then to check that they have received and read your CV.

Remember to keep any follow up correspondence short and to the point.

Step 4 – The Interview

Ok, so your CV and covering letter has done the job and secured you an interview – great! Here are a few tips to make sure you go into the interview well prepared.

Prior to the interview:

Obtain as much information on the contract role and the company as you can. Your agency will supply much of this but it won’t hurt to do your own research as well. Have any friends or colleagues ever worked there? If so, find out what you can from them.
The interview is not a one way process. Prepare for it as though you are selling your time and skills, and make sure you are clear on your requirements.
Do your research and make sure you understand the company’s work ethos, history, market place, operations and size.
Think about potential ideas you could suggest at the interview. If you can demonstrate that you understand their business and have good ideas, you will stand out from other candidates.
During the interview you will need to demonstrate how your experience, values and approach will fit in with the company’s culture and requirements. Spend some time before the interview to match these so you are prepared on the day.
Your interviewer will want to determine your values, attitudes, skills, and abilities. You will need to think about answers to popular questions like “tell me about a time when you used your initiative to solve a problem”. Think back and make some notes on instances in your working life where (1) you’ve taken initiative, (2) overcome challenges, (3) dealt with difficult situations, identified ways of improving procedures and (4) created opportunities for companies you have worked for.
Be prepared for additional questions which may include:
- What type of decisions did you make in your last job?
- How do you evaluate your own performance?
- How do you handle rejection?
- How do you keep up-to-date with trends in your industry?
- Why were you out of work for so long?
- How do you take direction?
- What do you consider to be your greatest weakness? How do you / have you overcome this?

During the Interview

First impressions really do last, so make sure you make the first few seconds count. Dress to fit in with the environment (if you’re not sure then over dress rather than under dress) and always try to convey confidence in your body language.
If during the interview you are asked a question that you don’t understand, don’t be afraid to ask the interviewer to clarify the question. Your responses will be more relevant if you fully understand what they are asking.
Have some good questions of your own to ask, many interviewers are swayed by an interviewee’s ability to think on their feet and come up with relevant questions. If you need to, write down some questions as you research the company and take them into the interview with you. Most interviewers will be impressed that you have come prepared. As we mentioned earlier the interview is a 2 way process, so don’t be afraid to ask the “what can your company do for me?” question, but this sort of question is best towards the end of the interview.

Follow up after the interview

According to recruitment experts a follow up thank you letter is a must. You should write individual thank you notes or letters to each person who interviews you within 2 business days.

Getting the right rate for the contract

Before beginning negotiations you need to ensure you fully understand the role and its responsibilities. Use the interview to extract all the relevant information about the contract so you can begin negotiations with all the facts.

Any contract that is offered through an agency is slightly more complex in that you are negotiating with both parties; the client and the agency. An agency usually gets paid a percentage of your hourly rate.

Before negotiations start make sure you know the market rate for the job you are taking on and ensure you have a lower level cut off point in your mind. It’s advisable to calculate your living and commuting expenses and decide on a lower rate that covers all your outgoings but still constitutes an acceptable income for the role you are undertaking.

When possible avoid naming the rate that you‘d expect, as this can often work against you. If you are pushed for a rate then it’s always best to pitch around the known market rate for the role, as this leaves room for further negotiation.

If you know that the recruiter is keen to hire you then they will expect you to aim higher, so they can negotiate you down to an agreed rate. You may be asked to justify the higher rate so make sure you’re prepared.

If the company has to stick to a lower salary bracket then consider negotiating further benefits and perks to make up for the lower rate.

Step 5 – Starting out as a contractor

So you’ve decided to make the jump into the world of contracting. The benefits of being your own boss, having the freedom to choose when and where you work and above all the opportunity to earn significantly more money, are all too good to pass up. Well, congratulations you’ve done the hard part and made the decision, now it’s time to start planning.

One of the first decisions any contractor needs to make is how to structure their new business. Historically, most contractors worked through their own limited company, as this represented the most tax efficient option. However, with the introduction of IR35 these tax advantages may have been removed depending on whether you fall within the IR35 “rules” or not. First, let’s look at exactly what IR35 is.

What is the IR35 legislation?

IR35 is a piece of legislation that was introduced to tackle tax and National Insurance (NIC) avoidance within the service industry, where companies have historically found it more tax efficient to distribute income as dividends. By using an intermediary such as a personal service company, workers were able to become “self employed” and reduce their tax and national insurance liabilities.

To combat this form of tax avoidance the government introduced “IR35 rules” that set out to test the employment relationship between the employee and the client. If the employee is provided by his limited company to an ultimate client on contract terms which would normally constitute employment with the client, this is called a relevant engagement and the IR35 rules apply. In this situation the concept of “deemed salary” is introduced and that income will be subject to tax and national insurance contributions, as if it had been paid as a salary.

For a detailed explanation of the IR35 legislation along with information on how to determine if it will affect you please read our IR35 Guide. You can also request an IR35 review from the specialists at Abbey Tax, at a cost of £200 + VAT per contract. It is worth noting that if you decide to use Freestyle Contractor, our all-inclusive accountancy service, your IR35 reviews are included in the monthly fee.

Choosing the right trading structure for your business…..

Umbrella Company, Limited Company or agency PAYE?

Following the introduction of the IR35 legislation, there are now only three real options open to contractors, so let’s have a look at each option in more detail.

The options available to contractors are as follows:

Option 1 – Umbrella Company (Payroll service)

An umbrella company is essentially an invoicing vehicle for contractors who want to avoid the administration duties normally associated with contracting, namely issuing invoices, chasing payments from clients / agencies, calculating tax and national insurance (NI) contributions and making payments to their bank account. It’s worth noting that because you are employed by the umbrella company, IR35 legislation does not apply.

Contractors who work through an umbrella service will submit timesheets and expenses (normally online) and then leave the rest up to the umbrella company. They will generate and send an invoice to the agency or client, chase payment when it’s due and then upon receipt of payment will calculate your tax and N.I and transfer your net pay direct to your bank account.

Umbrella Company Providers

Naturally, there is a fee for providing an umbrella service which can vary hugely between different companies.

For new contractors the umbrella company is often an appealing option, as it provides an easy and cheap way to decide if contracting is for you.

Many contractors, especially those who are contracting long term or want the best possible return normally decide to start their own limited company, which we will move onto now .

Option 2 – Limited Company (or Personal Service Company)

The vast majority of contractors work through their own limited company, as this is the most tax efficient method, enabling them to keep more of their income. However, these tax advantages are wholly dependant on whether they fall inside or outside IR35 “rules”.

Contractors who fall outside the IR35 rules will often be better off operating through a limited company, whereas those inside IR35 will often be better with an Umbrella company.

By setting up a limited company you have complete control of the running of your company and its bank account. Provided your contract falls outside IR35 (i.e. you’re not deemed to be an employee of the client using a limited company as a disguise) you may draw dividends from the company that are not subject to National Insurance (NI) contributions.

Many contractors decide against starting a limited company because of the day to day administration and the legal requirements all limited companies have to comply with. Whilst many accountancy practices offer services to remove many of these headaches (i.e. VAT returns, monthly payroll, annual company accounts, company formation and corporation tax returns), until now a truly comprehensive accountancy package has not existed.

With ‘Freestyle Contractor’, the administration burden of setting up and running a limited business is completely removed. Everything from company formation and the setting up of your bank account through to invoicing your clients, monthly payroll, annual account preparation and corporation tax returns are all included in the service.

You simply enter your timesheets and expenses online and Freestyle Accounting will handle everything else and provide you with an up to date live position of your company’s financial situation.

The Freestyle service includes:

Formation of your limited company
Registering your company for VAT/PAYE
Setting up your company bank account.
FREE IR35 status reviews at any time.
Acting as your registered office including full company secretarial service
An intuitive online system to enter timesheets and expenses
Generating and sending invoices to clients
Chasing payments from clients
Completing quarterly VAT returns.
Up to date live position of the company, showing profit to date, what you need to reserve for tax and what is available as dividends. All available through our online system.
Monthly payroll service including all year end submissions.
Annual Statutory Accounts including filing all statutory returns inc Corporation Tax Returns.
Personal Tax Return
Dealing with all correspondence from HMRC & Companies House
Advice on IR35 & S.660
Access to discounted professional indemnity insurance (with Ntegrity Professional Insurance)
HMRC investigation insurance.

Many competitor companies will claim that their service is comprehensive, but on further investigation you will find that there are a number of hidden charges and exclusions.

The ‘Freestyle Contractor’ service is positioned at the premium end of the market, providing a truly end to end solution for contractors wanting to reap the tax benefits of a limited company without the hassle and administration burden.

For more detailed information on setting up your Limited Company then please read our contracting through a limited company guide.

Option 3 – PAYE through an agency

The last and generally the least favourable option for contractors is the agency PAYE route. In short, you are employed by the agency so you pay full tax and national insurance contributions and you are either tied to working through that agency indefinitely or having to resign and join a new payroll scheme each time you change agency.

If you require any more information or would like a free ‘no obligation’ illustration of your possible income using these different options, please call one of our dedicated Advisors on 02476 426360 or email tax@freestyleaccounting.com

Step 6 – Signing Contracts

Once you’ve decided which trading structure you are going to use you will need to sign contracts with the various parties involved. Follow the relevant steps below depending on whether you have chosen to operate through an Umbrella Company or a Limited Company?

Limited Company – Signing Contracts:

If you decide to go down the limited company route then you will need to:

Send your new limited company details to the recruitment agency.
Sign the agency contract for the agreed period / hourly rate as company director of your limited company.

If you have negotiated a contract directly with the client then the contract will obviously be directly between the client company and your limited company.

Umbrella Companies – Signing Contracts

If you have decided to operate through an umbrella company then you will need to:

Sign the umbrella company provider’s contract for services, which is their terms and conditions.
Inform your chosen umbrella company about the details of your agency and the contract for services.
Advise your agency on the details of your chosen umbrella company provider.

The agency and Umbrella Company will then liaise with each other to sign a contract for your services, working through the umbrella company. You may be required to countersign the contract, following it’s signature by a director of the umbrella company.

Step 7 – Contractor Insurance

What insurance do I need as a Contractor?

As an independent contractor you will be providing your services as well as professional advice to clients. In the event that you make mistakes or errors while contracting for a client, they are perfectly within their rights to claim for negligence. For this reason many clients will insist that you are covered by appropriate professional indemnity insurance before they will hire you.

Most contractors will require the following insurance to ensure they are adequately covered:

Professional Indemnity Insurance (also known as PI Insurance)

Professional Indemnity insurance (PI insurance) protects contractors against claims for negligence, loss of data or documents, unintentional breaches of intellectual property and claims for dishonesty.

As the risks faced by individual contractors will depend on their area of expertise, specialist insurers will provide professional indemnity policies that are tailor made to the contractors area of expertise.

If you are working through an Umbrella Company, then this will normally be included in your fee. The amount of cover will vary between Umbrella company providers but you should look for at least £1 million professional indemnity cover.

Employer’s Liability Insurance

Employer’s liability insurance will cover any ‘employees’ you may have working within your company for any injury sustained at work. It is a legal requirement for employers to have Employer’s liability cover.

Contractors working through a limited company would normally only have one employee, which would be themselves. However, it is recommended that they still take out Employers liability cover, as this covers them for any accidents they may have at work.

If you are working for an umbrella company then the provider will have this setup already, normally to the value of about £2 million.

Public Liability Insurance

Public liability insurance protects you against your legal liability where you accidentally cause damage or loss to someone else’s property. It also covers you for any accidental injury you cause to someone else whilst working at clients’ premises.