Self employed contracting - how does it work?

Haych

Never done this before but seems quite popular in the IT industry.  I get many people asking me to go contracting but don't know how things like income tax and national insurance works, or how the organisation you're working for even pays you.

Is there a check-list of things needed before one can go contracting?  I'm sure there must be a few who make a living like this here so would love to hear how it's done from those who've done it.

Thanks in advance.

hubobulous

There's a lot to think about, but the key initial question is why do you want to contract?

The IR35 rules are changing from April onwards, meaning that your tax status will be determined by your end client rather than yourself - there's a lot to know about this so I'd suggest you read up on it. This may, or may not, affect your perception of how lucrative contracting can be.

I've been contracting for 13 years and do so largely because I hate the appraisal process and how its rarely aligned to performance, don't like being restricted to the amount of holiday I can take and I also like being my own boss. Its a mindset thing for me largely.

Once you take pensions, holiday pay, sick pay, training, benefits, bonuses, etc into account, you might well find that contracting is not the cash cow it can be perceived to be.

I'll dip back into the conversation and help where I can, but read up on IR35 and get your head around that along with what your likely day rate will be.

fields5069

It's a mare these days, at least as far as I understand it. Many more on here will know about IR35 and the attempt by HMRC to get everyone either as a permie or as a self-employed jobber - either you are in effect in a semi-permanent role or you need to be able to show autonomy and do well-defined pieces of work so you appear more as a "trade".

When I did a bit of contracting in the late 90s I just couldn't deal with the headache and ponied up lots of cash for HMRC.

Haych

Thanks @hubobulous - I did come across the IR35 thing and to be honest, like most things associated with HMRC, it just confused me.

I am attracted to contracting for most of the same reasons you are in all honesty, plus a lot of jobs that are coming my way are contract opportunities rather than permanent jobs, so it can't hurt to know about what it's all about, just in case.

I do fully understand that there are disadvantages as well as advantages to contracting.  Sick pay, holiday pay being just two.  That said, I've never ever spoken to a contractor who would go back to being a "permie" (as one contractor I know refers to them/us/me).

Snap

You could do worse than actually ring HMRC up to discuss. I've always found them very helpful. Ring a local office.
Have a look to see if there is a local business support service too, somewhere you can get advice.

shrinkwrap

Imagine you're a plumber. You do jobs for anyone who calls - you are self employed.

One day a big builder gives you a job. Then the builder gives you another job and pretty soon you are only working for them. The Revenue will say "Hold on, you're not self employed are you - you need to be taxed as an employee".

There's a grey area in between, when you might be doing both. Who gets to decide how long you work for the builder before you move from self employed to employee?

Contracting usually adds the intermediate thing of you being a company. The place with work then gives your company the contract and you, as the employee, can pay yourself in tax beneficial dividends rather than PAYE.

The minefield is with all the intermediate points and HMRC power grabbing.

A lot of government IT work is done by contractors so foot meet mouth.

Ossyrocks

Not heard of IR35 before and not sure if it applies to me either.

I'm self employed as a sole trader and file my own tax returns. Currently I'm working part-time doing admin for a very small charity and invoice them monthly for my hours. Will IR35 apply to me in any way? I've had a read on the GOV website and it keeps talking about businesses with turnovers way in excess of the charity I work for.

Rob.

musteatbrain

If they determine your hours and you are paid hourly doing admin. That will be within IR35 unfortunately.
It’s for them to determine that though 

Ossyrocks

musteatbrain said:

If they determine your hours and you are paid hourly doing admin. That will be within IR35 unfortunately.

Ok. What if I determine my hours, which I do?

Fretwired

Been doing it for 25 years via my own company. Check out the IPSE website - worth joining as you get member benefits, advice and help with things like IR35.

Plenty of advice on the website.

https://www.ipse.co.uk/

Jalapeno

hubobulous said:

Once you take pensions, holiday pay, sick pay, training, benefits, bonuses, etc into account, you might well find that contracting is not the cash cow it can be perceived to be.

In the bonanza years of the 1980s/1990s I was freelance for about 8 years, and that calculation convinced me to take the company car and go back into fulltime employment.

The independence and lack of corporate bollocks is harder to put a price on, but no less important.  Today I'd jack in the job immediately to go back to freelancing. My wife is already a freelancer/non-exec director - so we have a Ltd company ready, and a track record of stop/start working patterns in "management services". 

thermionic

I worked as a contractor for just over a year (in microelectronics, not IT). I couldn't be bothered with being self-employed or forming my own company etc so I went with the "umbrella company" that the employment agency recommended. It worked out quite simply - every week I'd email them my timesheet and expenses (travel/food/accommodation) and they'd work out how much tax I owed, pay HMRC and put the rest in my bank account. They took a cut of course, as well as the agency hiring for the company, and also the agency that found the job for me - bunch of parasites really.

It was fine until I got a letter from the HMRC telling me I'd been put on the wrong tax code for the duration - but luckily it was £1800 in my favour. I'd hate to go back to it, but there were quite a few contractors working for the company I was at, they'd made a career of it. This is only possible if you have lots of opportunities within commuting distance.

Haych

thermionic said:

I'd hate to go back to it, but there were quite a few contractors working for the company I was at, they'd made a career of it. This is only possible if you have lots of opportunities within commuting distance.

The company for whom I work have a lot of contractors at the moment.  Many, if not most, of them aren't local.  They clear off early on a Friday for the commute home and then do the reverse for a week to a local hotel on a Sunday evening or Monday morning.  No doubt they're claiming expenses somehow, possibly against tax.

EricTheWeary

Having done it very briefly ( not in IT!) I went through an umbrella company ( one the employer was used to working with/ recommended although I didn't have to). I can't remember their fee but it was pretty tiny and they were very helpful. 
I remember they were on the Isle of Man so I used to ask them dumb questions about that! 

Jalapeno

Haych said:

  No doubt they're claiming expenses somehow, possibly against tax.

Definitely !

roundthebend

Ossyrocks said:

musteatbrain said:

If they determine your hours and you are paid hourly doing admin. That will be within IR35 unfortunately.

Ok. What if I determine my hours, which I do?

As of April this year the responsibility falls on your client to decide. If they decide you are outside IR35 and pay you a gross figure so you can sort out your own tax, and then a subsequent HMRC investigation finds that to be wrong, your client will have to pay the tax that they should have done at source. So, many companies are taking the decision to rule everything inside IR35 and pay the tax at source, so you end up with less in your business bank account. So, they are opting to treat the contract as inside IR35 to remove any risk of a hefty tax bill later.

But, it's a complex system - because that will cause many contractors to go and get regular jobs instead, which means there are fewer gigging people to fill the demand, so rates will go up to balance it out to a degree.

ToneControl

Ossyrocks said:

Not heard of IR35 before and not sure if it applies to me either.

I'm self employed as a sole trader and file my own tax returns. Currently I'm working part-time doing admin for a very small charity and invoice them monthly for my hours. Will IR35 apply to me in any way? I've had a read on the GOV website and it keeps talking about businesses with turnovers way in excess of the charity I work for.

Rob.

IR35 applies to people running their own limited company, not to sole traders

musteatbrain

Tonecontrol is rIght, but the same tests apply and determine employment status. In which case they may see you as employed and not want to run the risk of employing you and you not paying your tax properly as they will be financially responsible for it if the HMRC do not receive what is due.

if it’s a long term thing they probably have enough trust in you to carry on.

the who decides hours thing is a funny one. Charging by the hour is a step closer to IR35 but if you decide the hours it’s less likely to be inside.

if someone employed there is doing the same work as you, it would be inside IR35.

there’s a lot of factors. The much maligned HMRC employment status tool online can be helpful, depends on the criteria.... and there’s a lot.

Half the time HMRC aren’t sure how to interpret the rules. it’s been a car crash in the public sector

BluesLover

Thanks to the onset of IR35 the good days of contracting are over. I'm now staff, after contracting on and off since the 1980s, and detest it. I don't think contracting rates will rise, because companies don't seem to have budgeted for it in their estimates for future projects. Government and HMRC are trying to get everyone to pay the same tax whether staff or not. None of of it has been thought through, and it's a total mess. Be very careful you don't end up with a massive NI and tax bill.

musteatbrain

Just to give another view....
out of the 200 plus contractors employed where I work in a public sector organisation since the rules changed there in 2017 
 4 are inside IR35 
I really don’t think much will change, after an initial knee jerk reaction things will probably settle down, and people will find a new way of working around the rules

ToneControl

musteatbrain said:

Tonecontrol is rIght, but the same tests apply and determine employment status. In which case they may see you as employed and not want to run the risk of employing you and you not paying your tax properly as they will be financially responsible for it if the HMRC do not receive what is due.

if it’s a long term thing they probably have enough trust in you to carry on.

the who decides hours thing is a funny one. Charging by the hour is a step closer to IR35 but if you decide the hours it’s less likely to be inside.

if someone employed there is doing the same work as you, it would be inside IR35.

there’s a lot of factors. The much maligned HMRC employment status tool online can be helpful, depends on the criteria.... and there’s a lot.

Half the time HMRC aren’t sure how to interpret the rules. it’s been a car crash in the public sector

to be clear (AFAIK) as self employed, with you not being the director of your own Limited company, it will not affect you. It can affect the employer of self employed people though, but they should know all this already: https://www.easyaccountancy.co.uk/resources/guide/sole-traders-and-ir35/

It has been a mess in the public sector, especially the case I've seen recently: my mate was doing a very senior role for HMRC, being told it was outside IR35, then having various strange changes happen to the way he was paid or treated over the last 2-3 years. Even HMRC could not decide how to handle IR35