Top 10 tips for new IT contractors

Thinking of going IT contracting? Attracted by the money and the freedom it should bring? Here’s some points – ten in fact -- you might not have considered, writes Alan Watts, a service management consultant (retired), with more than 40 years’ experience as an IT contractor.

1. Understand your job is no longer your job

It may sound counterintuitive, but your job is no longer whatever it is you do to earn money; your job is being a contractor.

Keep that in mind and a lot of what follows starts to make sense.

The main thing is that you are now selling a service, which brings its own challenges – but the very first challenge is letting your status as a service provider sink into your mindset!

Then, the other main thing to absorb is that you have to keep up with developments in your area of expertise. Or don’t -- but then you will soon have nothing to sell, because nobody will want to buy it!

2. Take a ‘I-need-to-know-everything’ approach to IR35 off-payroll rules

Despite some quite fierce opposition over the years, IR35 is still out there.

This is the piece of complex legislation that tries to treat you as an employee for taxation purposes on the basis that if you work for someone, you must be their employee. Well,  HMRC wouldn’t quite agree with that interpretation, and though IT contractors might -- it’s not quite that simple!

In reality, the best approach to avoid nasty tax-related surprises is the all-encompassing one -- try to learn as much as you can about IR35 and the off-payroll rules from properly informed, unbiased sources. So, probably not HMRC or a contractor recruitment agency.

3. Don’t ignore the small print

Contracts are important.

Make sure you read them in full; get them reviewed by a professional, get anything you don’t understand explained and challenge anything from the client/agency you don’t agree with.

Although IR35 cases are typically settled on the basis of actual working arrangements, the contract will be used to clarify any ambiguities, so make sure you understand what it is saying.

You’ll also need to check it for other clauses relating to your engagement, like payment terms, and contractual penalties if you pull out of the agreement prematurely (including by terminating your assignment early because a better one came along).

4. Know your limited company from your umbrella company

An immediate choice you have as an IT contractor, assuming you get one, is to run your own limited company.

Alternatively, you could choose to go through an umbrella company, although sometimes the assignment will as good as require you to use an umbrella. And often it's the umbrella(s) which your agency as good as mandates you to use.

Either way, a limited company has many advantages. Mostly, those advantages relate to you being in charge of what, when and how you work; operate and spend. Use an umbrella company and in my experience, much of those advantages go away, since you get paid just like a normal employee, except everything comes out of the money the client is paying for your services, including employer’s costs.

That said, you may want to use an umbrella company in the early stages of IT contracting while you learn all of the many things about technology contracting which you don’t know!

5. Factor in that when you don’t work, you don’t earn

It’s easy to be blinded by your new, impressive-sounding headline rate!

But you will only get paid for work done. That means bank holidays, your holidays, any enforced layoffs and times when the client has no work to be done, all represent days you don’t earn any income.

The same goes for the time between contracts. As all these periods crop up, make sure you have a ‘war chest’ to cover such times -- a financial buffer you build up to cover your downtime.

Oh, and you can add notice periods to that non-earning time too. In your contract, you may have a notice period (of sorts) but if the client decides it no longer has work for you that’s when they stop paying, regardless of what time is left on the contract.

6. Keep take-home pay focussed, due to the many deductions you’ll suffer

Regardless of how you get paid, there will be many demands on your income that have to be covered.

If you use a limited company, corporation tax; Employer’s National Insurance Contributions (NICs), Employee NICs, and normal PAYE taxes will be due to HM Revenue & Customs.

If you are IT contracting through an umbrella company, you need to add the umbrella’s fee and (typically) the Apprentice Levy to what comes out.

And you’ll invariably need business insurance, which you’ll have to foot the bill for as well.

Plus, if you do choose a limited company because it’s traditionally the most tax-efficient structure, never think of VAT (which you’ll likely be registered for) as your money.

Keep your VAT separate and similarly, I would keep 20-25% of profits back to pay corporation tax. What’s left over -- and yes, the deductions can seem endless -- is then mostly yours.

But as a rule of thumb, if your take-home is much more than about 70% for a limited company, or 55% approximately for an umbrella company, then something is wrong.

7. Be fluent in allowable HMRC business expenses

You will incur work expenses and you can reclaim the tax paid on them (not the whole expense) if you are outside IR35. The golden rule is that expenses must be ‘wholly and exclusively’ for business use. So no, forget that 55” plasma screen monitor!

A bit oddly, you can claim training costs in certain circumstances and professional development can be expensive, so that’s a good thing. But that’s only if the training course is directly related to your trade, so updating to the latest version of the tools you use is fine but learning accountancy isn’t (unless you’re an accountant of course).

The rules are many and varied so check before you claim, and in the event an inspector calls, keep careful records.

8. Keep your wits about you in the (necessary) world of tech recruitment agencies

To work, you’ll need to land a contract. If you have a network of contacts, use them and see about going direct-to-client.

Otherwise, the traditional route for IT contractors new and old is via a technology recruitment agency -- typically an advert of theirs, a posting on a job board, or on platforms like LinkedIn and of course, Free-Work!

The main ‘buyer beware’ here is that the agency could be good, bad or ugly. Regardless, the agency will get lots of applicants so it’s easy for you to get lost in the crowd. Also, the agent won’t have time to call you back, so feedback (about whether your application was good, bad or ugly) is likely going to be non-existent.  Don’t take it personally.

But further beware -- the agency will be looking only for freelance techies with the specific, current knowledge of the role they are trying to fill.

9. Transform your CV into a sales brochure

As an IT contractor, your CV stops being a record of past glories and has to become much more of a sales brochure.

Don’t go back more than about five years in any detail, since they experience will usually be irrelevant.

Read the contract advert carefully and note all the points where your experience is a match. Keep it brief in your application, but ensure you don’t miss your relevant ‘achievements,’ not simply tasks completed.

Likewise, if you can demonstrate ‘savings made’ or ‘problems resolved’ then get those to the front of your application. Always, always, always though - keep the info you’re going forward with tightly focussed on the opportunity in hand.

If you’re doing this correctly, this approach means you will need to spend time re-writing your ‘CV’ -- sorry your ‘sales brochure’ -- for each application. Don’t skimp here on the time investment. In my experience, 90% of the time, this is how you will get noticed.

10. Never stop learning what makes YOU a better IT contractor than THEM

If I had my time again, I’d probably fork out earlier on for a contract specialist (to assist with point 2, ‘Don’t ignore the small print’), and fork out earlier for an accountant (to assist with point 6, ‘Keep take-home pay focussed…’).

Don’t rush here, however. You want the best adviser that your money can buy, but be careful as it doesn’t always necessarily follow that when buying tax, legal or status advice, ‘you get what you pay for.’

Speak to IT contractors who are successful and further into the game than you, to learn from them about how you could improve. Some might echo my final tip here of getting professional advice in your corner from almost day one. Have they got an adviser they swear by, for example? Oh, and even more importantly for new IT contractors like you; how on earth did they land such a lucrative, fulfilling contract at a brand you’d just love to add to your own sales brochure!? Good luck new IT contractors...