Getting started as a contractor

If you're thinking about becoming a contractor, there are a number of things to consider. You must decide how best to set up your contracting business, as this determines how you're paid and what responsibilities you have for paying tax. You also need to know how to register.

Read on to learn more about what's involved when you set up as a contractor.

What is a contractor?

Being a contractor means providing services to a client (a single person, a company or another type of organisation) for a set period of time. Before you start, you'll sign a contract that lays out:

• the nature of the work you're being employed to do

• how long the contract runs for

• what payment you'll receive in exchange

Typically, you work at the client's offices or premises, along with their other employees. However, with the rise of remote working – and depending on the company's policy – you might work from home.

Though you're working for the client, you don't go on its payroll. That means you're responsible for paying your own tax and National Insurance and filing the necessary paperwork with HMRC.

Are contractors self-employed?

Not always. As a contractor, you can:

• be self-employed

• have the employment status of a worker

• have the employment status of an employee if you work for a client and are employed by an agency

Contractor rules changed in April 2021, meaning your employment status and the way you pay tax may have changed. Check the off-payroll working rules for IR35.

We explain the differences in the How do contractors operate? section below.

Is a contractor the same as a freelancer?

Not entirely. While both contractors and freelancers are usually self-employed, they operate slightly differently.

The two most popular options for contractors are setting up as a limited company or working through an umbrella company (see below). Sole trader can be another option, but is less common for reasons related to tax and liability.

Freelancers don't normally go through agencies or umbrella companies, and instead invoice clients directly for their work. They typically set up either as sole traders or limited companies.

How do contractors operate?

Generally, there are three ways to work when you're a contractor.

Through an agency

Like many contractors, you might work through an employment agency, as an agency worker. This gives you some employment rights, such as the right to receive at least the National Minimum Wage.

If an agency offers you a pay between assignments contract, you sign a permanent contract of employment with the agency and receive pay between each contracting job.

It's also possible to work through an agency and be self-employed. This way, you have the most flexibility but very few employment rights. It does, however, mean you can work through several agencies at the same time (as long as the agencies involved allow it).

When you contract through an agency, it's the agency that pays you – after deducting its fee – and not the client. Depending on your employment status (as mentioned above), you'll be paid as either an agency worker or an employee.

As your own limited company

Setting up a limited company is often the most tax-efficient way to run your contracting business, particularly if you're working on contracts that are outside the IR35 off-payroll rules.

As a limited company director, you're required to keep track of your income and expenses, including receipts and invoices. You'll also need to submit your year-end accounts and tax returns.

When you operate as a limited company, your clients pay the company, not you as an individual. By law, you must then pay yourself. There are a number of ways to do this, and which one you choose depends on your business's legal structure.

Through an umbrella company

Rather than create a limited company, you can work through an umbrella company. The umbrella company employs you as a temporary worker (an agency worker or a contractor), often on behalf of an agency. But it doesn't find you work – it's the agency that offers your services to clients.

Effectively, you become an employee of the umbrella company and get paid through the PAYE system. The umbrella company invoices clients on your behalf and processes your payments, accounting for tax and National Insurance. Normally, it takes a fee each time you're paid.

An umbrella company can often seem like the simpler option, especially to contractors who are just starting out, or looking to only contract in the short term. However, digital providers have made things easier, from helping with registration at Companies House to invoicing and managing your cash flow, so there may be less reason to use an umbrella company nowadays.

How do I register as a contractor?

The steps you need to take to register as a contractor depend on how you've chosen to set up your business.

Registering as self-employed/sole trader

If you're setting up as a self-employed contractor, by law you need to register with HMRC. The simplest way to do this is online.

Once you're registered, HMRC will set you up on Self Assessment, which is its system for managing income tax, VAT and National Insurance payments. You'll use this to file your yearly tax returns and make the payments you owe.

Registering as a limited company

If you're creating a limited company, it's quite simple – you can do it online via Companies House or through a company formation agent. First, you'll need to choose your company name and check if it's available.

Registering with an umbrella company

First, you need to choose which umbrella company you want to register with. You can do an online search to find directories of these companies, but the Freelancer & Contractor Services Association (FCSA) website has a useful list of accredited ones.

Although each umbrella company might have a different registration process, they will need the same information from you. Typically, you’ll be able to register over the phone or by completing an online registration form.

What else do I need to do when setting up as a contractor?

Open a business bank account

Once you've set up your contracting business, you'll need a business bank account. This is especially true if you've created a limited company, as the company is treated as a separate legal entity and you must keep the money the company makes completely separate from your personal funds.

Starling Bank's business account has a number of features which can benefit contractors. These include:

• instant notifications, when money is spent or received

• business spending categories to automatically organise and categorise outgoings

• multi-currency accounts

Buy accounting software

Using accounting software for your accounting and bookkeeping can save you a lot of money and stress. It's particularly good for cutting down the amount of time you spend on admin.

There are lots of accounting platforms on the market, but Starling Bank offers a Business Toolkit, which houses your banking and bookkeeping all in one place. You can manage your invoices, bills, tax, VAT and more all from your bank account, for just £7 a month.

If your accounting is a little more complicated, you could instead integrate your Starling Bank account directly with one of the popular accounting software providers like QuickBooks, Xero or FreeAgent, through the Starling Bank marketplace. Integrating in this way means your accounting application stays up to date with your banking data, which makes managing your cash flow easier.

Access support to start your business

Visit the StartUp UK hub for resources that give you the education and inspiration to get started on your entrepreneurial journey. 

Relevant resources

• Everything you need to know about registering your small business

• How to register as a sole trader

• Guide to starting a freelance business