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Switching from permanent to contracting


So, you have been seriously considering making the switch from permanent work to contracting. Welcome to the wonderful world of self-employment. At last count, there were roughly 5 million micro-businesses in the UK with five or fewer employees. The bulk of those companies consists of contractors who count family members or partners as fellow workers. It is evident from the statistics that contracting is alive and well in Britain.


If you are planning to switch, there are some very important things you need to be aware of. Switching is not as easy as saying goodbye to your employer on Friday and then picking up with your first contract on Monday. Contractors need to:


  • handle all accounting and tax issues
  • file necessary government paperwork
  • market themselves to potential clients
  • negotiate contracts on a regular basis
  • meet customer needs at all times
  • handle all customer dissatisfaction.


ICP Accountancy cannot help you market yourself, negotiate contracts, or provide quality service to your clients. However, we can help you with all of the administrative and accountancy functions pertaining to establishing a limited company, paying your taxes, filing government paperwork, and so on. We would be happy to assist you through our affordable, flat rate service. In the meantime, here is what you need to know about switching from permanent work to contracting:


IR35 Legislation


Making the switch from permanent work to contracting starts by knowing and understanding the IR35 legislation. The legislation was implemented in 1999 to prevent companies from avoiding taxes by creating what are known as 'disguised employees'. The new contractor who runs afoul of IR35 will be subject to certain penalties as well as increased tax liabilities.


There is a long list of criteria that determines whether a contractor's work falls within the scope of the legislation. You can find the information on the GOV.UK website along with a full explanation of how to determine whether your work qualifies or not. We will handle IR35 compliance for you if you sign up with ICP.


Umbrella or Limited Company


As a permanent worker on the payroll of another company, your only obligation is to show up for work and do your job. Things are different as a contractor. There are certain responsibilities that go along with contracting relating to financial reporting and taxation. In order for the government to apply the law in your case, you will have to decide whether you are going to work under an umbrella company or establish your own limited company.


An umbrella company is an employment agency that essentially acts as the contractor's employer. The contractor still has the freedom to accept or reject contracts and, in most cases, set schedules and perform work as he or she sees fit. The umbrella company handles invoicing of clients, collecting payments, and paying contractors. The umbrella company also handles VAT and PAYE.


The contractor who chooses to set up a limited company becomes both a salaried employee and the director of that company. Not only does the contractor have to handle all of the responsibilities of marketing, negotiating, and providing services to clients, he or she is responsible for all financial reporting and tax issues as well. This can be rather complex. However, ICP makes the complex simple by taking on all of the accounting and reporting responsibilities of the contractor. Our low, flat rate service is the perfect accounting and tax solution for any contractor.


Making the Actual Transition


Assuming the IR35 legislation and the umbrella versus limited company issues do not scare you away, the next step is to plan your actual transition from permanent to contract work. Quite a few contractors file limited company paperwork with HMRC and Companies House while they are still working as permanent employees. This enables them to keep collecting a salary while the paperwork goes through the necessary channels. Nevertheless, there is no need to do things this way.


It is important for the future contractor to give the current employer proper notice before leaving. There is no use burning bridges on your way out the door; you contractor may need that former employer sometime in the future. It is also helpful to be up front with your employer about your plans to work as a contractor. They might even be willing to award you with your first contract.


Part of making the transition is to secure that first contract to get you working. It turns out that the possibility of getting a lucrative contract is that which prompts some workers to make the switch from permanent to contracting. Nonetheless, be aware that a single contract is not likely to sustain you for your career. You should have plans in place to pursue future contracts even during the early stages of your first job.


Long-Term Planning


Last but not least is the idea of long-term business planning. One of the biggest advantages of transitioning from permanent to contract work is the potential to earn quite a bit more money. However, earning more without proper long-term planning is a mistake. There are many reasons, beginning with the fact that contractors experience periods when there is just not enough work. Proper plans need to be put in place in order to ensure the contractor's finances are always stable.


Part of that planning has to do with taxes. Moreover, because setting up a limited company is more tax advantageous than working for an umbrella, ICP encourages this option for new contractors. Setting up and planning the future of a limited company is the best way to enjoy working as a contractor while maximising your earning potential.


Switching from permanent to contracting work could be the best decision you will ever make. Nevertheless, do not make that switch without doing the research first. If you have already completed the research, consider working with ICP as your specialist accountancy partner. We handle establishing your limited company and routine accounting so that you can concentrate on serving your clients.

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