Costs to Consider As an IT Contractor

An IT contractor is only as valuable as the skills he or she possesses. The cost of an average degree in IT is around £35 000, which makes it one of the largest investments that you will make in your quest to become an IT professional (contractor or otherwise) and get the jobs that you desire.

Essentially, you will be operating as a business, and as such you will have to choose whether to form a limited company, join an umbrella company or go for the default sole proprietorship. Being your own boss means that you have to handle all of your finances, expenditures and taxes, so it is critical that you choose the best business type to suit your needs.

Tax is an important consideration when deciding which business type to choose. The IR35 became law in 2000 and closed many of the loopholes that were available to those operating under a limited company. This means that many IT contractors with contracts of less than a year long simply joined an umbrella company in order to save costs and reduce all the administrative hassle of handling the financial side of their business.

Umbrella companies offer a range of services that enable IT contractors to focus on their core competencies. The most common services that an umbrella company provides include tax management, accounting and any other administration.

A limited company has some good benefits for IT contractors looking to get involved in a longer term project, that is, projects where contracts are available for one year or longer. Limited companies also enable IT contractors to claim back a wider range of expenses, including accountancy fees, equipment and software costs.

One of the most important tax breaks available to IT contractors is their pension contribution. If you are not currently investing in a pension plan then you are missing out. Pensions offer tremendous tax benefits and can save you having to pay a portion of income tax and employees and employers national insurance contributions among other taxes.

It is important that when deciding on whether to embark on the path of an IT contractor you are aware of the financial costs and opportunity costs that are involved. An umbrella company requires little more than you filling out accurate time sheets, so if you wish to focus on the task at hand and enjoy the income then that is the option for you. However, if you are an entrepreneur at heart, then a limited company may be the best option, the running of which can be made considerably easier by working with an accountant whose speciality is in working with an IT contractor.

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