IT Contracting: How to move from permanent to contracting
Guest author Rick Huby is Head of Mobile Systems for aparito, a medical technology company specialising in remote patient monitoring. He has 10 years working as an IT contractor prior to becoming a permanent member of the aparito team. As a contractor he has worked with a range of organisations including MoneySuperMarket, AutoTrader and BBC.
14 MINUTE READ
Choosing the life of a contractor can feel like a really big step when you are sat in a nice safe permanent job.
Having to find jobs on a regular basis, dealing with VAT returns, invoices, and much more can seem daunting when you are used to a steady income and familiar surroundings. However, making the move is not as difficult as you might think, and it offers some freedoms and benefits that a permanent job doesn’t.
Getting started as a contractor
To work as a contractor you need one of two things to get going, either an umbrella company or a Limited company.
An umbrella company lets you contract and takes away much of the admin hassle of running a company. Understandably they charge a small fee for the trouble. Many accountancies, especially ones which specialise in IT Contractors, will offer umbrella company services.
A Limited company offers more flexibility about how you can use your money money and can be more tax efficient than an umbrella company. However, these savings are offset by the increased overhead on managing it.
For example, with a Limited company you don’t have to pay yourself all the money that is invoiced, you can keep some back and pay yourself as and when is required (or whenever is most tax efficient) or save more of the money within the company for a rainy day.
There are many online services available for setting up your Limited company. They charge a small up front fee for doing it and you can have the company up and running within a few days.
The one essential thing you’ll need though is an accountant. They can offer lots of advice on running your company and will help to ensure you are fulfilling all of your legal duties to the tax man. Many accountancies can help you setup your Limited company.
Once you have chosen whether to go with an Umbrella Company or a Limited Company, here are two other important things to keep in mind:
I would recommend getting a separate email address for your company related matters. This gives you one simple place to check for anything coming from your accountant or that you need to deal with. It also means that important messages such as “Don’t forget to submit your VAT return” don’t get lost behind Facebook updates and newsletters.
You may also want to use this for anything job related (e.g. LinkedIn or listed on your CV) as again it helps keep things separate and stops them getting lost.
Running a company does take some admin time and effort. The best way to keep on top of this is to simply set aside 30 minutes a week to do any admin tasks you need to do. Some weeks you may not even have anything to do. This time can be spent doing any bookkeeping tasks you have to do, raising invoices, and any other accountancy and similar tasks that need to be done.
Sometimes you may find you have a bit more today, for example at year ends or tax return time, but you can probably keep on top of most of this with a dedicated 30 minutes per week.
The golden rule of hiring and firing is that whilst a tech CV gets you to an interview, it’s people skills that actually get you a contract. The people hiring are likely to be people you would be working with so building rapport with them during the interview is key.
Most people find interviews a stressful experience, but if you know your subject area then you shouldn’t come unstuck in an interview scenario.
Try to be relaxed and find ways to make light conversation as part of the interview – remember that you are also interviewing them to see if it is a contract you would want to take.
Finally, come prepared with a few questions. Sometimes questions will naturally come to you during the interview based on the discussion points you have had, but if they haven’t then use some pre-prepared ones. Some ideas include:
- Can you tell me more about the team I would be working with?
- What technologies do you work with?
- How does the team/project fit into the overall structure of the company?
Agencies vs direct approach to clients
IT recruitment agencies get paid by the client to find contractors for projects they are running. This is almost always done as a percentage or fixed value on top of the day rate that a contractor charges. As a contractor you would typically be charging the recruiter directly who then charges the client with a bit on top for their finders fee.
If you can find a job working directly with the end client then this can be more lucrative as there is no recruiter to pay. This is most likely to happen if either you already know someone at the company or you are contacted by their HR department directly.
Recruiters will have access to many more opportunities than you can find yourself though, so whilst you may feel like it is better to try and go direct, you’ll be missing out on 90% of the opportunities out there.
Build Relationships with recruiters and HR teams
You can quickly become inundated by all the emails and messages from recruiters (both agencies and internal HR departments) and it can become a tiresome task managing this.
I would advocate either having a separate email account or some sort of filter that captures all of the incoming job related emails. This stops the incoming emails from either getting lost or from swarming your inbox.
Unless you are actively looking for work you can mostly just leave the emails and just have a quick run through them every week or so.
They are usually worth running through if you want to get a sense of what is happening in the industry and to gauge what sort of money is being offered. If you do want to respond to them then I would suggest setting aside half an hour once a week and running through the ones from the last week or two. Anything older is almost certainly irrelevant.
To make things easier I would suggest creating a couple of template email responses and just reply one by one using the template of choice. Here are a few of examples you can use.
Good Job Match
Thanks for getting in touch but I am not looking for anything at the minute. The match is good though so please consider me for similar roles in the future. I expect to be available around [INSERT DATE].
Good Job Match, Bad Location
Thanks for getting in touch but I am only considering roles in the [APPROPRIATE AREA]. The match is good though so please consider me for similar roles in the future. I expect to be available around [INSERT DATE].
Bad Job Match
Thanks for getting in touch but this role does not really match my experience. I’m only considering work in [INSERT SOME TECHNOBABBLE RELATED TO YOUR WORK AND LOCATION]. Please update your records. I expect to be available around [INSERT DATE].
Thanks for getting in touch.
The Naughty List
If you are constantly contacted by the same recruiter or agency with irrelevant jobs then feel free to add them to your spam filter. I usually give them a couple of chances but then feel guilt-free in removing them from my life!
Suggesting Alternative Candidates
If a role comes through and is not for you, but you know someone suitable, then it is good to pass on their name. You could be helping out both the recruiter and your colleague. Some recruiters pay finders fees too.
Internal HR Departments
If you are contacted by a relevant HR department then I would suggest simply following the above process. Personally I find that Internal HR departments send out a lot less badly targeted offerings, possibly because they will have someone from the tech team helping their search, so they are much less likely to end up on the naughty list.
I normally respond to a company that could be relevant, even when I am not looking as I think the time investment is more likely to be beneficial long term. I am also far more likely to connect on LinkedIn with HR department staff than recruiters. This can be useful when you are looking for work as you have a ready made targeted audience you can speak to.
Use LinkedIn and Twitter
If you use these you will almost certainly have a circle of relevant followers in recruitment and HR positions, as well as peers who you’ve worked with in the past. If you are definitely leaving a role you can announce this on these networks to stimulate some interest.
Your CV and Profile
These days LinkedIn is king. Over the last 7-8 years I think all of my own contracts and positions have come either through LinkedIn or personal recommendations from other contractors I have worked with.
You will however still need a CV as most recruiters and companies will ask for one. You can generate one from LinkedIn itself but you may prefer to create one you can share in Word or similar.
The basic advice is that a CV should be no more than 3 pages long. This becomes more of an issue if you have a long career, but after the first few roles you can just get away with a simple sentence or two describing the role e.g. “Managed team of 5 developers over two year project – Contributed to architectural vision and worked with CTO on it”
Integrating into new companies and roles
One of the big challenges of being a contractor is in integrating with new teams when you get a new contract. This is no different than starting a new permanent position, but you can do a few things to ensure that you make a good impression.
- Try and make a few social events in the first few weeks – drinks out, lunch out or even a company event are easy opportunities. Anything where you can get to know people outside of the work you are doing allows you to build up relationships.
- Take time to get to know your team. What are their interests and hobbies? Do they have a spouse? Children? Where else have they worked? Small bits of of information like this give you the ability to talk about things other than the work.
- Don’t limit yourself to people you already know in the company – they can be a great source of introductions and information but it is also easy to ignore new relationship building when you already have a ready made relationship.
Keeping your skills up-to-date
As a contractor you are likely to move around a lot more than as a permanent employee. In my experience this has the benefit of exposing you to more ranging technologies and approaches and helps broaden your experience in and of itself.
Outside of this getting involved in meetups, tech gatherings, open source projects or side projects can help to expand your experience and give you some advantages when looking for new contracts.
Managing the company finances is one of the main things which puts people off of contracting but it doesn’t need to be a daunting task. I’m not a qualified accountant so if you are going to make the move into contracting I would strongly recommend getting proper advice from one! Hopefully the below will give you an idea of the financial management side of running the company and your own finances through the year.
You will have a salary, just like any employee of a company, but you need to pay yourself it! The easiest way is to agree the level of salary with your accountant at the beginning of the tax year and then to simply set up a standing order for a specific date each month.
The company will also have to submit National Insurance (NI) contributions throughout the year – your accountant should be providing this information.
As you may have done when working for other people, you may run up expenses in the course of business. This could be anything from travel expenses to purchasing IT equipment. The easiest way to manage this process is to submit a monthly expenses claim which you can then pay yourself.
Your accountant will provide some advice on how this will work, but essentially keep the receipts/proofs of purchase together for a given month and record the details in something like a spreadsheet or accounting software.
Expenses can have an impact on your VAT returns, company and personal tax returns so it is essential that you keep this information.
Dividends are bonuses paid to shareholders of a company based on it’s profit. Dividends are taxed differently than salary and again will have an impact on your personal tax returns so correctly recording this information is essential.
As you are probably aware, VAT is tax added the price of something. If your company is VAT registered then it too will need to add VAT to the price of it’s goods and services. All companies turning over a certain amount (£85000 at the time of writing) must be VAT registered.
On a quarterly basis all companies must submit a VAT return to the HMRC and pay over the VAT that is owed. If your company has purchased more than it has sold, then the HMRC will actually owe your company VAT.
VAT is calculated by adding up all the invoices that the company has raised and taking away all the company costs which include VAT. So for example a phone bill, laptop or stationery purchase will all have VAT on them. The VAT on these products will be deducted from the VAT you added to your invoices during the VAT period to calculate the VAT owed to HMRC.
This may sound like a lot to deal with but typically the accountancy software or accountant themselves will handle all of this – the key is to ensure that the information you need captured correctly.
Personal Tax Returns
Tax returns are required for people whose income streams are not known up front. If you only have a salaried income then you will probably not need to submit a tax return. If however you have dividends (from your company or otherwise) then the tax you owe can only be calculated after the end of the tax year (April to April).
This is money that you will personally have to pay, not out of your company coffers. It would be advisable to put some money aside each month to cover these costs when they arise.
Negotiating day rates
Negotiating on a day rate is very similar to negotiating a salary. It is simply about finding a value which both parties agreed on. Sometimes a contract opportunity will be advertised with a rate (or rate range) listed which makes the process simpler. If not, you need to ensure you are clear before any interviews on what the day rate being offered is.
Things to consider would be the work on offer, distance for travel and who the work will be with. You may consider an opportunity a long way from home if it is very lucrative and at a high day rate with a company you would really want to work with. You are likely to accept less money if a contract is available on your doorstep.
It helps to have evidence of value when trying to negotiate the rate. If there are many similar opportunities with higher rates then a simple search can show these which you can share the the HR team or recruitment agency. If the skills they are looking for are particularly rare then this can help in negotiations as the recruiter will have fair fewer options.
The best way to negotiate a higher rate though is to have more than one offer on the table at once. If you have two offers and one is higher (or more convenient) then that is a significant bargaining chip to use to discuss a higher rate.
Negotiating a change to the day rate is a tricky position and one that some people find difficult. Permanent members of staff often have annual raises built into their employment contracts, as well as personal development plans and annual reviews to provide evidence and opportunity for discussion of raises.
A contractor does not – it is simply a transaction between two companies. At the end of an agreed contract period, there may be an “extension” offered. This extension is simply another contract with a fixed price in it. There is no obligation for a client to offer a new contract, and if one is offered there is no obligation for the contracting company to accept.
This extension point though is the simplest point to discuss a change in the rate. After a period of time contracting for a company there will be significant knowledge of their industry or products which has value. As with any initial rate negotiation, it will really help to have other offers which you can use as leverage.
If a recruiter is involved then the discussions may be through them. This can be easier in some ways as it takes some of the personal negotiation out of the way, but it does take away some of your own control of the negotiation. This can be either good or bad, depending upon how comfortable you are with this negotiation process.
It is unrealistic to expect a rate increase upon every extension, however in a long term contract every 12-18 months is reasonable in my experience. If the terms of the contract change, such as a change of location (assuming you are required to work on premises with a client) then that is the one exception where I would expect there to at least be a discussion available.
As a permanent member of staff you have a nice convenient holiday allocation given to you so you know how much time off you have. As your own boss you are unlikely to have given yourself a set amount.
When you start contracting it is easy to get caught up in the “time is money” mindset and to feel guilty about taking time off when you don’t get paid for it. The second concern is the fear of where your next paycheck is coming from.
These concerns are understandable but the old motto of “work to live, not live to work” is important to keep in mind. Without adequate rest and recuperation you will get tired and worn down so ensure you consider how to fit time in.
Finding time for holidays
If you have a contract coming to an end you can select your next contract start date a week or two after the end of the previous contract, neatly fitting in a break at the end of one project and prior to the next.
As a contractor you have to keep in mind that you are usually paid better than the equivalent permanent position so you need to consider that you should be more than able to afford 25 days off a year.
If you are running you own Limited company then this is a good reason to build up some cash reserves within the business as it takes some of this sort of stress away.
Should you become a contractor?
Both permanent and contractor lives have benefits and drawbacks, but for me it is worth giving it a go for a few years. Contracting allows you to broaden your network of industry contacts, provides you with a variety of work and gives you a taste of running your own company which will all be valuable for you long term – if it doesn’t work out you can always go back to life as a permie.
Obviously, the decision is yours at the end of the day, but the demand for tech staff is very high right now, so the risks are minimal. Go on. Give it a go!
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