Guide to contracting

Guide to contracting
Guide to contracting

Making the jump from permanent employment to contracting can be daunting. It is important that you understand everything before making a change. Here, we summarise all the key points so you are set up for success in your contracting career.


  1. Pros and cons
  2. Limited company vs umbrella company
  3. Setting up a limited company
  4. IR35
  5. VAT
  6. Expenses
  7. Contractor responsibilities
  8. Myths about contracting

Making the move: the pros and cons of contracting

They are many different reasons for making the move into contracting. These might include looking for the next step in your career, needing more flexibility and wanting to maximise your take home pay.

Whatever the reason, switching to contracting is a lot simpler than you may think. Here are some of the pros and cons to help you make the right decision.


  • You’re no longer an employee and are your own boss
  • You can expect to earn more money as a contractor
  • You can claim business expenses related to working as a contractor
  • You have greater control over who you work for, when you work and where you work
  • Greater opportunity to expend your skills and knowledge
  • You can take breaks between contracts to get the right work life balance
  • You get to work with different people on different projects


  • Less job security
  • If you don’t work you don’t get paid
  • It is your responsibility to find your next contract so be proactive with job hunting
  • No holiday pay or sick pay
  • No company benefits like pension contributions
  • You may face a longer commute for the right contract
  • Having to take care of and pay your taxes, no PAYE like a permanent role

Limited company v umbrella

One of the first decisions you will need to make when making the jump into contracting is to choose between running your business as a limited company or working through an umbrella company.

These are two very different ways of operating, so what’s the difference?

Limited company Umbrella company
Leave permanent employment Yes Yes
Claim legitimate business expenses Yes Yes
Work for a variety of clients Yes Yes
All tax and National Insurance obligations taken care of No Yes
Receive employment rights and benefits No Yes
Be your own boss Yes No
Benefit from a tax efficient structure Yes No
Grow into a small business Yes No 

Setting up a limited company

So, you have made the decision to set up a business, but what do you do next?

There are several key steps to follow when forming a limited company. Here are the key things:

1. Name your company

You will need to come up with a name for your company. This is your opportunity to put your stamp on your business and can be fun thinking up unique names. You can use the Companies House company name availability checker to see if the name you want to available.

2. Incorporate your company

Once you have chosen a name you need to incorporate the company by registering it with Companies House. This can be done online or by post.

You will need to appoint at least one director and shareholder when incorporating the company. That is likely to be you although you can add additional directors and shareholders.

3. Inform HMRC

You must inform HMRC that you have incorporated a new company within three months of starting any business activity.

Once your company is incorporated you may also want to register with HMRC for VAT and register as an employer.

4. Open a business bank account

It is important to understand that your personal finances are separate from your business finances so you will need to open a business bank account.

There is a wide range of options so it is important to find an account that fit your requirements.

5. Take out business insurance

As a contractor you’ll need to take out business insurance in order to make sure you are covered if something goes wrong. The typical requirements for business insurances will be professional indemnity, public liability and employer’s liability.

6. Appoint a good accountant

All the administration involved in running a limited company may seem overwhelming at first so it is important to get the right advice.

Appointing a specialist contractor accountant like Taxevo will help take the hassle out of running your business and help you with important dates, your IR35 status and making sure you stay compliant with HMRC and Companies House.


As a contractor it is important that you understand IR35. Introduced in 2000 to stop people starting up limited companies to carry out the same jobs as permanent employees (known as disguised employment), IR35 looks at your employment status on an assignment by assignment basis.

Over your lifetime as a contractor, you will have multiple contracts and some of these will be inside IR35 and some will be outside IR35.

In an HMRC crackdown on disguised employment, from April 2017, all assignments in the public sector now have their IR35 status determined by the end client rather than the contractor having the freedom to decide their status. At present these changes do not impact the private sector.

Your IR35 status will affect the way you can pay yourself. Being inside IR35 means you are treated like an employee in terms of having to pay tax and National Insurance on your full income removing the benefit of being able to take a combination of salary and dividends via your limited company.

It is important to get your contract reviewed to determine your IR35 status and at Taxevo we will be happy to carry out a full review of your contract and working practices.


So, do you need to register for VAT? There is a requirement for you to register if at the end of any month the taxable turnover for any consecutive 12 month period exceeds the registration threshold (£85,000 from April 2018).

Even if you do not expect to exceed the VAT registration threshold, you can voluntarily register. There are several reasons for this: in some industries it is expected you are registered, it looks more professional to be registered and it may be financially beneficial if you make a lot of purchases.

Once registered, you may find it beneficial to use the Flat Rate Scheme (FRS). This scheme is available to businesses whose turnover does not exceed £150,000 (excluding VAT). This scheme allows you to charge VAT at 20% then pay back to HMRC at a lower rate depending on your trade sector.


It is important to understand all the business expenses you can claim when running a limited company. These are directly linked to the amount of tax paid and can help maximise your take home pay. Remember to keep receipts for all expenses incurred for a minimum of six years to satisfy HMRC.

Here are some of the typical expenses that you can claim:

  • Travel
  • Accommodation
  • Subsistence
  • Telephone and internet
  • Use of home as office
  • Childcare
  • Training, manuals and text books
  • Charitable donations
  • Entertaining
  • Business insurance
  • Pensions
  • Computers and other office equipment

Please see our expenses guide for more detail.

Contractor Responsibilities

Running a limited company brings certain responsibilities. A good accountant will be able to help with these.

Annual accounts

These need to be submitted to Companies House each year and are typically due nine months after the year end date.

Corporation tax return (CT600) and paying corporation tax

These need to be submitted to HMRC along with a copy of the annual accounts within 12 months of the year end date. It is common practice for these to be submitted at the same time as the accounts are delivered to Companies House.

Payment for any corporation tax is due nine months and one day after the year end date and is paid by bank transfer.

Confirmation statement

This provide Companies House with the up to date information to display on the company record and includes details on directors and shareholders. You must submit this on an annual basis and Companies House charge a £13 filing fee.

VAT returns and paying VAT

These are usually quarterly and can be submitted online with HMRC or through an accountant. Payment for any liability can be made by BACS or direct debit.

Real Time Information (RTI) and paying PAYE and NIC

You must submit information about employees salary and PAYE and NIC to HMRC via RTI each month. Payment for any PAYE and NIC should be made by bank transfer.

Self assessment and paying personal tax

A company director is required to register and submit a self assessment tax return. The tax year runs from 6 April to 5 April and the return and payment must be made by the following 31 January. Payment is made by bank transfer.


Here we look at some of the myths surrounding contracting so you can make an informed decision.

Contractors don’t have job security.

Research shows that UK businesses are increasingly turning to contractors to gain access to the key skills they need.

Mindsets around a job for life are changing with many professionals seeing contracting as the next stage of their career. Contracting opens a whole new world of flexibility.

“Contractors don’t earn more than permanent workers.

This is not true. You’ll be able to earn significantly more as a contractor, especially if you have an in demand skill set.

A contractor has the ability to tailor their earning in the most tax efficient way through a limited company, something a permanent employee cannot do.

Contractors’ skills become outdated.

A common myth is that a contractor’s skills can become redundant quickly. In reality this is no different to a permanent employee. You must keep your skills up to date and you can even claim the cost of training through your limited company.

There is too much legislation to get my head around.

There is a certain amount of truth in this one, however with the appointment of a specialist contractor accountant, like ourselves, you will receive the expert advice to ensure you’ve got everything covered.

We are here to help

This is just some of the information to help you make an informed decision about embarking on a career in contracting. We can give you tailored advice specific to your business right from company formation to your day to day compliance.

If you are interested in joining Taxevo, please call 01962 790237 or email