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IT Contracting: Is it right for you? Part 2

After reading part one of our free, comprehensive guide on how to know whether IT contracting is right for you, there are a few more “housekeeping” aspects to think about…

How much to charge

This is a tough one. In the world of contracting your worth is usually determined by the end client. That age-old saying “it’s only worth what someone is willing to pay for it” is definitely true in this world. So be realistic & do your sums. Work out what you need to take home at the end of each month/year (after paying tax & national insurance & travel expenses & putting some money into your pension etc) in order to maintain your lifestyle.

Once you’ve worked out your absolute minimum, look at job adverts to see what other people with your skill-set are earning in the contracting market in your area.

Some agents will tell you the best way to secure your first contract is to start at a lower rate to get the first contract under your belt and to charge more after that. This can be true, but once you set your rate it is very hard to justify increasing it significantly after that. 

Imagine the conversation; “Well, you did the last role for £300 per day, this is the same role – so why do you now want £400?”  

If you choose to start off at a lower rate, just be prepared to justify your rate increase later down the line, especially if you then go back to work for the same company at a higher rate!

Once you know roughly how much you want to charge for your services, you need to remember that you might need to be flexible to secure the role. I’ve spoken to a lot of contractors who think they are more likely to be selected for a contract if they charge less than their competition. This works…sometimes…but it mostly depends on the hiring manager’s psyche.

If you price yourself lower than your competition some hiring managers will think “wow, that contractor is great value for money, what a great deal!” whilst others will think “why are they cheaper than the others, what’s wrong with them?”. 

This is where your recruitment agent’s relationship with the hiring manager can make all the difference – if they know the hiring manager well enough, they will be able to advise you on the best route to take.

Finding a contract

You have a few options to secure your first contract:

  1. Ask your current employer if you can work for them as a contractor on a stand-alone project. This is usually a hard sell because they are unlikely to want to pay you more to effectively do a similar job.
  2. Apply for contract jobs on the job boards, just like you would for permanent roles.
  3. Build relationships with a couple of local & reputable recruitment consultants who can proactively find you your first contract. Ask contractors in your network if they can recommend anyone & see if anyone’s name is mentioned by more than one person.
  4. Utilise your network. If you’ve been working for more than 5 years you’re likely to have met a lot of people who might be able to introduce you to a new project. Don’t be afraid to ask for referrals or recommendations from your previous or current colleagues – the easiest way to get a contract is to be referred by someone already working on the project!

How are you going to get paid?

Before starting a contracting career, many people don’t realise that there are actually 3 different ways to get paid as a contractor:

1. PAYE (Pay As You Earn)

This is when the employer or recruitment agency pays you directly into your personal bank account. You will pay the same taxes & national insurance as you do when you’re a permanent member of staff meaning on average you will take home 60% of your day rate. This option is unpopular with IT contractors because you will earn much more than as a permie, meaning you will be taxed at 40% (known as ‘base rate tax’) which will impact your take-home pay significantly.

2. Umbrella

An umbrella company is effectively an outsourced payroll company. They charge you a small amount for their services (how much depends on which umbrella company you choose), which include insuring you, paying all your tax and national insurance, paying your travel expenses, etc, meaning you will take home approx. 70-75% of your day rate.

3. Start your own limited company

This is by far and away from the most popular choice for day rate contractors because you will take home around 90% of your day rate. Your day rate will be paid into your business bank account, then you will pay yourself a salary, pay taxes, travel expenses, etc. There will be an initial cost associated with opening your own limited company – you’ll pay to register the limited company with Companies House, pay to open your business bank account, pay for your own insurances, pay an accountant, and so on.

Our advice

If you aren’t sure whether contracting is going to be a long-term career for you, but you want to give it a go, we suggest being paid via an umbrella company for your first contract. If after a while you decide to remain contracting, this is a good time to set up your limited company and be paid via that method moving forward.

This way you have the best of both worlds – you can start contracting immediately and try it out without the hassle of setting up your own limited company.

Notice Periods

This one is a bit of a warning. As a contractor, you are a flexible resource so you are likely to have a very short notice period in your contract. Some clients will ask that you give them 4 weeks’ notice if you want to leave, yet they will only have to give you 1 week’s notice if they want to get rid of you.

Some recruitment agencies will even have a clause in your contract stating that you cannot give notice at all. Notice periods are negotiable for most clients and asking for a reciprocal notice period is not uncommon. Before you sign your contract, check the notice clause and ask if it can be amended if you find yourself feeling uncomfortable with the terms. The last thing you want is to find yourself out of work because you didn’t check the contract thoroughly.

Work with Distinct

At Distinct, we match IT and technology candidates to their ideal job opportunities across the UK. We are always looking to speak to professionals in the sector. Contact us today to learn how we can support you to take the next step in your IT contracting career.

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