September 5th, 2024
The world of contracting offers unparalleled freedom, flexibility, and control over your professional life.
Whether you’re looking to make the switch from traditional employment or are entirely new to the workforce, becoming a contractor can open up exciting opportunities. But how exactly do you become a contractor, and what steps should you take to ensure success?
This guide walks you through everything you need to know about how to become a contractor, from choosing the right industry to managing your finances and building a client base.
What is a Contractor?
A contractor is an independent professional who provides services to clients on a contract basis.
Unlike traditional employees, contractors are not bound by long-term employment agreements, giving them the freedom to work for multiple clients or switch projects frequently.
Contractors typically work in various industries, including construction, IT, finance, and creative sectors.
Learn more about mortgages for contractors to see how your financial freedom can extend to homeownership.
Benefits of Becoming a Contractor
Before diving into how to become a contractor, it’s worth understanding why so many professionals are drawn to this career path. Here are some benefits:
- Flexibility: Contractors can choose when and where they work.
- Higher Earning Potential: Many contractors can charge more for their services than they might earn as an employee.
- Diverse Work: Contractors can work on various projects for different clients, broadening their skill set and experiences.
- Autonomy: Contractors have more control over the type of work they take on and how they run their business.
How to Become a Contractor: 7 Key Steps
1. Choose Your Industry
The first step to becoming a contractor is deciding which industry to work in. Contractors are needed in almost every field, from IT and marketing to construction and consultancy.
Some industries may have specific qualifications or experience requirements, so make sure you have the right credentials to succeed.
Find out how contractors can manage their finances to ensure success when starting in a new industry.
2. Acquire Necessary Skills and Qualifications
Before starting your journey as a contractor, it’s essential to ensure that you possess the necessary skills, qualifications, and certifications to operate in your chosen industry.
For instance, an IT contractor might need certifications like CompTIA or Cisco, while a construction contractor may require specific safety and trade licenses.
3. Decide on Your Business Structure
Once you’ve chosen an industry, it’s time to set up the legal structure of your contracting business. In the UK, contractors can operate in one of two main ways:
- Sole Trader: This is the simplest and quickest way to start. As a sole trader, you own the business and are personally responsible for its debts.
- Limited Company: Many contractors choose to set up a limited company. This structure offers more tax efficiency and limited liability protection, meaning your personal assets are protected if something goes wrong.
You may want to consult an accountant or a financial expert to decide which structure is best for you. Explore how CMME can support contractors in managing their finances.
4. Register Your Business and Get the Right Insurance
Once you’ve chosen your business structure, you’ll need to register with HMRC for tax purposes.
If you’re setting up a limited company, you’ll also need to register with Companies House.
Insurance is also a critical part of being a contractor. The type of insurance you’ll need depends on your industry, but common types include:
- Professional Indemnity Insurance: Protects you against claims of professional negligence.
- Public Liability Insurance: Covers any injury or damage caused to a client or their property.
- Employer’s Liability Insurance: Required by law if you employ other people.
5. Find Clients
Finding clients is one of the most challenging aspects of becoming a contractor. When starting, you may need to put extra effort into marketing your services and building your reputation. You can find clients in several ways:
- Networking: Attend industry events, conferences, and meetups to meet potential clients and other contractors.
- Online Platforms: Sites like LinkedIn, Upwork, or PeoplePerHour allow you to showcase your skills and connect with clients.
- Referrals: Ask previous employers, friends, or industry contacts to refer you to others who may need your services.
Creating a website or portfolio to showcase your work and skills can also help attract clients. CMME also offers tailored financial advice to help contractors invest in their business and grow their client base.
6. Set Your Rates
Deciding how much to charge as a contractor can be tricky. You want to set rates that reflect your experience and expertise while also remaining competitive. Here are some factors to consider when setting your rates:
- Industry Standards: Research what other contractors in your field are charging.
- Project Complexity: Higher rates should apply to more complex or specialist projects.
- Business Costs: Don’t forget to factor in your overhead costs, such as insurance, office supplies, software, and taxes.
You may choose to charge clients by the hour, day, or on a per-project basis. Always be transparent about your pricing from the start to avoid misunderstandings. Find financial products designed specifically for contractors to help manage overhead costs and optimise your business.
7. Manage Your Finances
Managing finances as a contractor is quite different from being an employee. Since you won’t have a steady paycheck, you’ll need to be diligent about keeping your finances in order.
Some tips for managing your finances as a contractor:
- Keep track of all your income and expenses. This will make things easier when filing your taxes and claiming any allowable expenses.
- Set aside money for taxes. Contractors are responsible for paying their own taxes, including VAT (if applicable), national insurance, and income tax.
- Consider hiring an accountant. An accountant can help you navigate the tax system, maximise deductions, and ensure you remain compliant with all financial regulations.
CMME’s expert mortgage advisors can guide you through the financial complexities of contracting, ensuring you remain on solid financial ground.
Legal Considerations for Contractors
As a contractor, there are a few legal considerations to keep in mind.
One of the most important is IR35 legislation. This law is designed to prevent contractors from working as ‘disguised employees’—someone who works like an employee but avoids paying the taxes employees are required to pay.
For more detailed information on IR35, check out this guide from GOV.UK.
Is Contracting Right for You?
Before embarking on a career as a contractor, it’s essential to weigh the pros and cons.
While contracting offers flexibility and potentially higher income, it also comes with risks, such as an inconsistent income, lack of benefits like paid holidays or pensions, and the need for strong self-discipline.
Ask yourself:
- Are you comfortable with financial uncertainty?
- Can you manage your time and workload independently?
- Do you have a plan for finding and retaining clients?
If the answer is yes, then contracting could be a highly rewarding career choice!
Final Thoughts
Becoming a contractor can be an exciting way to take control of your career, offering flexibility, autonomy, and the potential for higher earnings.
By following these steps—choosing your industry, getting the right qualifications, setting up your business structure, and managing your finances—you’ll be well on your way to a successful career as a contractor.
Remember, the journey may not always be easy, but with perseverance, dedication, and smart planning, contracting can offer a fulfilling and lucrative career path.
Ready to become a contractor and start your journey toward professional independence? Contact CMME for expert financial advice tailored specifically to contractors.