What is a Contractor? | What To Know Before Becoming Self-Employed

18th May 2021 / in Contractor Mortgages & Protection Blog / by Gordon Hunter, MD


If you’re reading this article, there’s a chance that you’ve already considered making the change from being an employee, to self-employed as a contractor.

While the prospect of working for yourself might sound daunting at the beginning, there are a lot of misconceptions out there and it is important to be well-informed before deciding if a career as a contractor sounds like the way to go for you.

Regardless of whether you’re considering making the change from a full-time job to becoming a contractor, or you’re just interested in understanding the role a bit better, we put this article together to help deal with some of the most common questions when it comes to working as an independent professional.


what distinguishes it from other types of employment?

Contract work benefits individuals and companies with work that can be done on a full-time or part-time basis.

Contractors provide their skills or services to a company for a specific period of time. They may be contracted for a certain number of hours, a time frame or the entire duration of a specific project.

Contractors are sometimes referred to as freelancers or self-employed individuals, who sell their services on a contract basis rather than having continuous employment with one company.

They are commonly found within construction and are hired by companies to complete set projects.

Although, in recent times, more & more contractors are coming from an IT background, with a skill set that is suited to a variety of industries.

Why Businesses Use Contractors over hiring somebody full-time

There are many reasons why companies like to use contractors:

  • They are less of a long-term commitment than hiring someone full-time.
  • In some instances, it is just easier than trying to hire the perfect candidate.
  • Certain contractors may be able to an additional skillset, that your workforce may be lacking.
  • Some view them as the perfect option to manage a large but temporary increase in a companies’ workload.

Advantages of working as a contractor

Flexibility of Work

Being a contractor has many advantages, but the most obvious pro that contractors enjoy is the flexibility and the freedom to choose their own work-life balance. Being your own boss can be extremely enjoyable and satisfying. You are not bound by their employer’s hours or routines. On average, contractors tend to have more free time than full-time employees because they don’t need to clock in for set shifts or deal with the pressures of an office environment.

With this type of work, contractors also have greater control over their daily schedule – which means they can organise it around family and other commitments without any problems at all. Contractors can even set aside time specifically for training and development.


An average contractor’s fee is higher than that of a full-time worker.

Contractors are typically paid higher rates because the nature of the relationship is more flexible, and projects can be short-term. However, some jobs can last for years.

You can offset your business expenses against your gross income, in order to deduct a large sum from your total taxable income.

Working for multiple clients at the same time can also result in a significant increase in how much you earn. This can help in the long run when it comes to big purchases, such as securing a home.

Developing Skills

Contractors have more freedom to work with different companies, which can lead to a wider range of skills and experience.

It is a great way to Gain an understanding of different company cultures, processes, operations and structures. This offers the ability, to build up a wide-ranging CV and to establish a significant list of contacts.

Different organisations offer different opportunities for career growth and learning. This allows you to work on your skills without being constrained by one company’s processes or values.

Disadvantages of working as a contractor

There are disadvantages that make people hesitant to dip their toes into the world of contracting.

Most notably, you will have to find your own work, and ensure that you have enough money coming in to keep living the lifestyle you want.

You will need to negotiate your work rates for the first few months & some can find it challenging to figure out what they should charge.

There are also a lot of things to think about when it comes to finances. Taxes, VAT and national insurance aren’t always easy to wrap your head around.

If you want to be financially stable, you need to plan for when you get ill/sick. Maybe save a little bit each month in order to cover for events like this.

It is sometimes hard to adjust to working on your own.  Thus, it is important to build up a good support network to help manage the various elements of your business well.

Can I keep my day job to start with?

Some contractors start by offering their services on a part-time basis because it is less of a risk, but there are some pitfalls. There is the potential of clients not taking you as seriously or becoming frustrated when they cannot get in touch with you during normal working hours. So although this can be a good way to test out contracting work, be aware of the issues that may arise.

What is the difference between contractors, freelancers

You tend to find that a freelancer will provide their services for a company and then perhaps move on, whereas a contractor is bound by a contract. meaning that their work will not be finished until what was agreed upon has been achieved.

Contractor vs. subcontractors

When a client hires you to work on a certain project, you are generally considered an independent contractor. You’re responsible for all the work necessary to finish any project. Subcontractors are people or organisations that the contractor hires, to ensure that a job is completed.

How to become a contractor

Do your research

The first step you’ll need to do is to conduct in-depth research, and think through various important factors—from finances and tax implications, to lifestyle and business opportunities. This will help establish if working for yourself is the right option.

It is important to ascertain if the benefits such as increased income & flexibility outweigh the fact that you will have lower job security.

Are you comfortable dealing with day-to-day challenges without the assistance of colleagues? Do you have the motivation & confidence to go out & secure new leads & clients?

Business structure strategy

Limited company

An option for self-employed operators, who are knowledgeable in their field of work, is to set up and operate a limited company. This enables more control over your finances and decisions & is seen as the most tax-effective way to operate. With this, you do need to be aware that more responsibility will fall on you. You must be the director, manage your accounts, and declare taxes & VAT where applicable.

Sole trader

As a sole trader, you’re personally responsible for the finances of your business. — including bills, losses and keeping accurate records of your sales as well as expenses.

You are responsible for how you run your day-to-day operations, scaling your business and what to do with the money after taxes.

One of the most difficult parts of operating as a sole trader is, being able to manage and juggle multiple responsibilities and priorities.

Umbrella company

If it is difficult to get to grips with the ins & outs of contracting. If you work under an umbrella company, your tax and national insurance needs will be taken care of. This enables you to focus on securing new leads & clients.

Certain Umbrella companies will offer a contract of employment, meaning you will have access to the rights of a regular employee. This includes the likes of sick pay, maternity/ paternity cover & business expenses. For some, this can help reduce the pressures of working for yourself.

Admin won’t be an issue, but you’ll have to worry about their fees and accept that you won’t be maximizing your earnings.

Set up insurance

Contractors work under their own company so many feel the need to have insurance in place. Contractors are not employees, so they don’t have the same company insurance coverage. This can cause them to be financially vulnerable. Contractor insurance is advisable. Without insurance in place, they are financially liable for any mistakes, errors or absence.

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