The current COVID-19 pandemic has brought about a country-wide phenomenon of introspection, causing the UK to slow down and take stock on an unprecedented scale. Alongside recognising the things you're grateful for during this strange time, perhaps you've identified certain areas of your life that require change and improvement, and how you work could be one of them. With more time on your hands, are you considering making the switch from sole trader to a limited company contractor? Or maybe you're seriously thinking about making the leap to self-employment? Being your own boss can certainly be rewarding but what’s the best way to go about setting up on your own?
Let’s explore the pros and cons of the different ways to work for yourself.
What makes a contractor different from employees and temporary workers?
A contractor has a very limited selection of employment rights. As a contractor, you agree on fixed-term contracts and provide your services for clients subject to these agreements. Like a temp, you’re not considered a permanent member of staff. As a contractor, you’ve got more flexibility than an employee but more stability than a temp. Many see being a contractor as the best of both worlds.
As a temp, you are engaged for a limited time. These engagements are usually more short term and you’re often paid by the hour rather than receiving an annual salary. You may have some employment rights but certainly less than an employee.
A term that, hopefully, most of us are familiar with. An employee relates to anyone who’s employed to fulfil a job on a more permanent basis. They receive wages and benefits from their employer but have PAYE Tax and National Insurance contributions deducted from these wages. As an employee, you have employment rights too, like paid holidays and sick leave, redundancy protection, and guaranteed hours.
What are the different ways you can be self-employed?
Sole trading is often referred to as the simplest form of self-employment. To perhaps oversimplify it, for a contractor their limited company is the business but for a sole trader, they as an individual are the business.
A partnership is a business owned by more than one person. Like a sole trader, both partners are liable for loss as individuals. Profits are shared and PAYE Tax and NIC are paid by each individual in the partnership.
Limited Company Contractor
As a limited company contractor, you and your business are separate from one another. Shares of the business are owned by individuals, these shareholders (and you) are not liable for any loss as losses are only deducted from the business itself. Any profits are owned by the limited company and you can then, after the relevant tax deductions, take a salary from the limited company.
Things to be aware of when self-employed
Yes, contracting is an extremely popular way of working - people make the switch from more traditional employment every day. However, before you feel ready to take the leap, it is important to ensure you are fully educated on the potential risks of being a contractor.
Most of you will have heard of IR35 before. Yes, it’s confusing and yes, you can get into some hot water with HMRC over your employment status. However, with some education, sensible precautions, and good client communication, genuine contractors should be able to avoid that particular tax trap. I suggest taking a look at our article to get informed on what the IR35 legislation could mean for you.
Managing your own accounts
This can be a dealbreaker for some - you will have to manage your own accounts. However, it's important to remember that there is plenty of affordable accounting software out there - FreshBooks, QuickBooks, and Xero being three of the most popular - for new contractors. You might even choose to hire an accountant to keep things simple so you spend more time doing what you love (we even wrote an article on how to choose a great contractor accountant here.)
Not receiving payment for work done
While the vast majority of clients will no doubt be honourable, as a contractor, there is no guarantee that you will be paid. However, there are certain precautions you can take to avoid this predicament, including running a finance check on your end client before agreeing to work with them, making sure you set out a payment clause in your contract and building a good rapport with your point of contact.
Lack of stability
It’s no secret that as a contractor you lack the stability that employees have so readily. There is no promise that there will always be work for you and as a result, your income could be unpredictable.
However, what is seen as a negative could also be interpreted positively. Self-employment provides complete flexibility and allows you to work on your own terms. In fact, thanks to a survey taken in January 2020 by our sister company Dinghy we now know that 91% of freelancers stated that being their own boss improved their quality of life.
Demand for highly skilled and flexible workers will skyrocket when the world returns to normality, and if you’re currently out of work, you have plenty of time to plan out your business strategy.
If you are considering setting up a limited company, you may want to consider planning your next steps. Don’t underestimate the importance of getting the right business insurances as well as getting your contracts reviewed by an IR35 professional to stay outside the legislation. Until 2021, it's still your responsibility to set your employment status when completing your self-assessment.