We are living in the era of the self-employed. Nearly one in six of us now works for ourselves – either as contractors, freelancers, consultants, or agents. Leaving the world of permanent employment is a big step and it’s not one to be undertaken lightly because it’s true to say that the first 12 months are a rollercoaster both emotionally and financially.
Ask nearly any contractor though whether in hindsight they regret making the switch and it’s rare that you’ll hear a negative response. Let’s find out why.
If you are considering contracting, it is valuable to have a realistic view of the hurdles and challenges as well as an appreciation of the perks that come with contracting.
Pros of life as a new contractor
Contractors have much more control over their own career and their life than those who work in traditional employed roles.
You can earn far more as a contractor than as an employee. According to the Office of National Statistics and as reported by BM Magazine, the average full-time employee working in IT earns £44,695 a year whereas 4 in 10 independent contractors working in IT “reported day rates of £500 or above, suggesting that if they were to work five days a week on average, it would take just 18 weeks to earn £45,000”.
But it’s not just the financial boost in terms of income that helps contractors enjoy a heightened lifestyle, it’s how they calculate tax too. As a contractor, you’re able to reclaim expenses that an employee pays full price for. If it costs £150 a week for an employee to do their job, that’s £150 taken away from their income. A contractor can claim these expenses back and if their turnover is high enough and if they have registered for it, offset the VAT on those purchases too.
Finance aside, your ability to increase your earning potential is also much easier. With control over your own career path, the opportunity to keep your skillset up to date is much greater because you’re in control of your own training and development – you’re not reliant on the budget of the company you work for and the whims of their management team.
Depending on the training you undertake, and the demand for it in the marketplace, every £500 you spend on training (which you can claim back against for tax) could produce ongoing multiples of return as clients engage with you at a higher rate for the specialist skills and knowledge you will vis a vis their employees and other contractors.
Cons of life as a new contractor
By its very nature, life as a new contractor is tougher in the first 12 months. There’s much more paperwork involved than when you were an employee and you have to keep on top of that paperwork to ensure enough money flows into your household.
In the early days, you have to constantly promote your name in the hope that you’ll be noticed by potential clients with a specific need for your skills. As one contract draws close to its end, it’s always better to have a new contract ready to start work straight away.
If your work is stop-start then it could have financial repercussions. For example, if you move into a contractor role that pays 20% more per week than your employed one, that’s not going to help you if you’re not working 30% of the time you were.
To help ensure a constant array of contract options, you may wish to use job boards like TotalJobs, CW Jobs, Planet Recruit, Jobsite, Jobserve, CareerBuilder, or CVLibrary to discover which contracts are coming up soon which you can offer to fulfil.
There’s also one other downside to working on a day rate. If you fail to get your day rate right then you could end up losing money. That’s because a 20% pay rise per day could be misleading. As a new contractor, you won’t know the ins and outs of what it takes to fulfil a contract. So if you’re charging £300 per day but end up working 10 hour days before you even get time to invoice, then your pay rise won’t cover the increased time costs of being a contractor.
Lifehacks for new contractors – make contracting profitable
Time management
Time management is critical to ensure that the contractor rates you charge are adequate for the quality of work you are providing your clients. This may be a challenge, but it’s also an opportunity to make the most of the time you decide to allocate for a contract against your time for enjoyment and life outside of work.
If you are new to contracting, you may find a “time tracking app” helpful to record the time spent contracting. This will help you determine the rate you need to charge your high-value clients. Mazcloud.com has an excellent list of apps to help contractors track time.
Be more organised
Even for those already contracting, keeping organised may be a challenge. Using one of our top 5 apps for contractors will help keep you on track.
Being organised will enable you to keep up professional standards, to fulfil clients’ expectations in time, and to ensure that you are stress-free when it comes to keeping on top of your priorities.
Be prepared for time off sick, for holidays, and for tax
16million people in the UK have less than £100 in savings, according to the Money Advice Service.
Contractors need to be much savvier with money than employees to cover for periods of time when not working, for corporation tax (if you use a limited company for your contracting business), and for extended periods of voluntary time-off (long holidays and so on).
If you are operating through a limited company, put aside 20% of your earnings for corporation tax. You probably won’t need quite as much once your expenses have been taken into account to determine your actual profit level, but it’s better to take a conservative approach when you’re planning for taxes.
How many weeks do you want to work a year? Divide the amount you want to earn in a year by the number of working days in the year to come up with the day rate you need to charge. Then add 30% to account for time not working and corporation tax.
Let’s say you wanted to earn £50,000 in a year and there were 220 working days (44 weeks out of 52 giving you 8 weeks’ holiday a year) – this equals a day rate of £227. Add 35% to it and you’re left with £306.
But you can’t plan for everything. Have you thought about how to deal with illness or time off you need to take but for which you haven’t prepared? Consider taking out contractor income protection insurance which pays up to 70% of profit pre-tax for sole traders or up to 80% of salary and dividends for company directors.
Optimise your work life balance
Subject to flexible clients, contractors with excellent planning and time management skills can maintain a good work/life balance with time set aside for expanding skills and qualifications or attending industry events.
While this may take some time to master for those who are new to contracting, it is a valuable skill to develop over time by getting to know your most profitable clients, their needs, and how their expectations match your working habits. While a high paying client might seem attractive at first glance, a seasoned contractor knows that a day rate isn’t everything and if your end client offers no flexibility or is difficult to get along with, then fulfilling the contract can become a negative experience.
Flexibility aside, while contractors may have variable long and short-term contracts, it is important to ensure that you don’t burn out. Jondjanoes.com suggests knowing when to take a break as one solution.
45-year-old Fernando Gonzales told the Telegraph.co.uk “Now I only go for contracts where I can either cycle or run to my client’s offices. It’s important to get the work-life balance right.” Like Gonzales, you can apply your personal parameters to decide which contracts match your lifestyle.
Work on contracts you love
Having the luxury to choose the contracts you are passionate about comes after attracting high-value clients, hours of research and building your own marketing machine to compete with the rest of the market. If you have an abundance of contract choices, then picking the right one for you is much easier.
As a new contractor, you will have to find your own contracts and this requires time, effort, and networking. Starting out in contracting may take some time until you get your pitch and marketing right but it is worth the effort when you are succeeding in your first contract. At ContractingWISE, we work with contractors and recruitment agencies so if you’re looking for your next contract, get in touch.
Collaborate with other professionals
A common myth about contractors is that they spend their day working in isolation. This couldn’t be further from the truth. As a contractor, you will also have opportunities to work alongside other professionals in your field. Even the stay-at-home contractor will have daily communication with clients, colleagues, and other professionals to provide the clients with the best possible service and expanding their professional network.
If you’re struggling for contracts, or want to simply to build new networks from your home office then a great idea would be to join networking communities such as LinkedIn.
Next Steps
We hope these tips help you stay positive and grounded to grow your contracting business in a way makes that you happy.
Whatever your industry, if you would like to speak to ContractingWISE about making the most out of your contracting career you can contact our team by calling 0203 642 8679 or request a free consultation.
