Whether you’re just starting out in the world of work, or have a few seasoned years of employment behind you, there has never been a better time to move from the world of employment into contracting.

While the much publicised financial benefits of contracting are often the main draw, for many the lifestyle benefits and freedom offered by being a contractor offer just as much benefit.

As the age of life long employment comes to an end, final salary pension schemes disappear and company/employee loyalty is at an all-time low, moving to contracting is becoming the preferred route for many as contracting offers much more control over both your income and ultimate career path.

What are the pros and cons of contracting?

Of course, there are pros and cons with any career move and while as a brand we’re naturally going to promote the benefits of contracting it’s important that you know the downsides that can come with the huge bump in take home.

While the average IT employee in the UK earns a decent £45,000, two out of every five IT contractors actually earns a hefty £500 per day, meaning that the salary equivalent for an IT contractor is a whopping £85,000 more at £130,000.

With such great incomes on offer it’s no wonder that around the world contracting is on the rise. Yet it’s not all gold plated pay cheques. For many contracting is a leap into an insecure world of short term contracts that can leave some out of work for weeks on end. Of course, that’s an extreme but without a good recruitment agency on hand to find your next contract or a decent pool of contacts it’s important to remember that a good day rate is only as good as the length of the contract you have right now.

As a contractor you’ll have to pay for insurance

But job security isn’t the only reason that contractor rates vary so wildly from their employed counterparts. The truth is that as a self-employed contractor you’re going to cover a large amount of the risks involved with fulfilling your work and the costs that come with employing you too; because after all they aren’t your boss any more, you are.

As a contractor you’re going to need insurance to cover the work you produce, you’re going to have to account for the costs of the time you take off on holiday (during which when you can’t invoice), and factor in costs you’ve never thought of before like processing your taxes or filing accounts. All these costs add up, which means that if you’re not careful, you might under-price your day rate and end up worse off overall.

Getting your day rate right is harder than it looks

Now a £85,000 hike for an IT contractor is probably going to be enough to cover it the extra costs you’ve taken on, but there are other contractors that won’t enjoy such hefty pay rises and as such getting your day rate right is paramount.

Once you know how much you’re going to earn, you’ll quickly need to plan out how you’re going to actually account for your time, invoice for your work and ensure you’re paying the right amount of tax. Until now you’ve simply shown up for work and then been paid on a fixed day each month.

No one came to you to ask you what you did or even how many hours you worked, but one day you woke up and you’d been paid your salary, less tax. Just in case you wanted to know how much that was there was a handy payslip provided too (all for free).

You’ll need to decide how you’re going to pay the right amount of tax

As a contractor that employee perk of waking up to find you’ve been paid is going to stop for all but one option (an umbrella company). If you’re comfortable with the extra responsibility of paying yourself and your taxes there’s varying ways for you to account for your time, and no one way is the best.

In order to get your tax affairs in order it’s really important that you fully understand your self-employed options before you start out.

In essence there are three ways by which a contractor can be paid, via working as a sole trader, as a company director/shareholder or through an umbrella company.

For most, working as a sole trader is quickly dismissed as an option because the cash flow implications of having to pay tax in advance are for many a big negative. This leaves most contractors weighing up whether to work through a Limited Company or an Umbrella Company.

So what is an umbrella company?

At Umbrella Broker, we specialise in helping contractors to compare umbrella companies online. To us, umbrella companies are the perfect vehicle for anyone considering contracting because they don’t have the hassle or long term problems associated with limited companies. This makes them perfect for people who aren’t sure if contracting is for them in the long term, as you can come and go as you please, only paying for them as and when you use their services. They are also the closest thing to being employed when it comes to your taxes, because you technically are employed for the purposes of paying them.

So what is an umbrella company? An umbrella is essentially an employer of contractors that exists solely to help them invoice for their time, collect their debts and pay the right amount of taxes.

The reason they employ contractors is simple, because by acting as the contractors employer they can process their taxes just like your employer would today, complete with a net tax payment into your bank account and payslip via email.

While you’ll retain the freedom you enjoy through being a contractor, this special arrangement for tax purposes is the perfect introduction to contracting. There is however one problem, umbrellas can be expensive, lowering your weekly or monthly net pay due to the amount you need to pay them to process your payroll (making finding the right one through a comparison site super important).

What happens when you sign up to an umbrella?

Once you’ve found the perfect umbrella for you, it’s important you understand how the engagement process between you, your umbrella and your new client will work.

It’s important to remember that signing an application isn’t the end of the process. In fact your application will allow the umbrella to talk to your agency, set you up on their payroll, provide you with insurance and talk you through how to submit your timesheets.

Then once you’re all set up you can take your first steps towards being a successful contractor.