What are the costs of contracting?

When moving to contractor from ‘permie’ -- as it’s called in contractor terms, there are a number of key costs to consider in advance, writes chartered accountant Graham Jenner, founder of Jenner & Co.

This article will not explore the potential costs for first-timer contractors of being caught by IR35, or being decided inside IR35 by a client, as although that would indeed put a big dent in your take-home pay, it requires a large analysis worthy of article in itself.

So, other than the potential costs of IR35 (which just because they are excluded here should not be overlooked), the major costs of professional contracting are as follows:

1. Set up fees

Setting up as a sole trader has no cost whatsoever. However setting up a limited company – which is the preferred corporate vehicle by agencies and clients -- has a small cost.

You can form a company yourself, online and browse different fees. But I would advise enlisting an accountant to assist with the company formation, in order that the share structure is properly considered.

2. Paying an accountant

You will probably need to appoint an accountant, anyway, to assist with registering your new business with the various authorities (Companies House, HMRC, for example). And an accountant will help with your year-end accounts and tax return.

The cost of accounting fees annually, or just the cost of an accountant to set up your company to get your limited company contracting career off the ground, are estimated at this article’s conclusion.

3. Insurance

As a contractor, you will need to consider various insurances. These are relatively inexpensive for most contractors, dependent on the line of business.

Public liability insurance

PLI protects your business against compensation claims and their legal costs if you cause injury, including death, to a third party or damage to their property. It is not a legal requirement, but your client may require you to have cover up to a certain level.

Employers’ liability insurance

This is a legal requirement unless you are the sole director of your limited company, own 50% or more of the shares, and have no employees.

However, you may find some of your clients require you to have this cover in place before you commence work.

Professional indemnity insurance

PII provides cover for legal costs and expenses incurred in your defence, as well as any damages or costs that may be awarded, if you're alleged to have provided inadequate advice, services or designs, that cause your client to lose money.

Insurance for equipment

If you are going to use your car for business make sure you have insurance that covers that, so car insurance is another potential insurance-related cost to consider.

4. Replacing those lost employee benefits

If you are currently employed, your employer may be providing certain benefits as part of your employment package. 

Once a contractor, with those benefits lost, you may want to replace some of them – and often the key ones contractors replace are.

• Life insurance
• Health cover
• Sick pay (an employer may have a fairly generous sick pay policy)
• Pension contributions

5. Equipment

Your employer may previously have provided all the equipment you required for work.

However, if you ‘go it alone’, you will probably need to provide your own equipment. For computer equipment, don’t forget that the cost of software. And also don’t forget, self-provision of equipment is an age-old, albeit small, pointer away from being in IR35's scope.

6. Car

If you were lucky enough to have a company car as part of your employment package as a permie, then now funding a replacement vehicle, whether as an outright purchase or some form of finance, could result in a significant cost.

7. Travel and accommodation costs

You may find that taking different contracts as an independent freelance professional may result in you travelling more than you used to for your normal commute to your previous 9-to-5 work. You may also incur accommodation costs if the contract means you need to work away from home.

8. Trade or professional body subscriptions

Your employer may previously have covered these costs for you, to help keep your skills/expertise/knowledge up-to-date. It could be very disadvantageous to you, professionally, to switch this resource off.

Alternatively, while employed, you may not have needed to take out a membership to a work-related body, but it could now be a necessary cost once you are out on your own, as an independent contractor. That cost will likely be monthly or annually.

9. Training

You will probably need to demonstrate that you are keeping up-to-date with your professional development, beyond just being subscribed to trade journals and the like. This may mean committing to expenditure on training, courses, and follow-up materials, like reference books and webinars.

10. Advertising, website set-up, marketing

Depending on the sector you work in, it may be necessary to advertise and/or set up a website, and most contractors both create a website and market it, for both IR35-related purposes and direct-to-client opportunities.

11. Bank and broker charges

While relatively small, your business is likely to incur some bank charges. You should also factor in forking out transfer fees to exchange money, if you plan on contracting overseas.

As contractors tend to need specialists for other services too, including relating to contracts/the law, employment status, and even securing a mortgage, expect at some stage to need to pay other brokers/advisers too.

12. Non-tangible costs

As well as monetary costs, there are other non-tangible costs to consider before jumping into contracting.

Each person will be affected differently, but they are important factors to consider

• Lack of job security – some new contractors really struggle with the uncertainty of contracting, especially at times when only very short-term contracts are available
• No entitlement to redundancy or other employment rights – contractors will usually be the first to be let go if a project is delayed or cancelled.
• Risk – quite apart from the lack of job security, there are other risks associated with contracting. Notably, there have been changes in legislation from successive governments which have had a significant impact on how contractors operate and earn, such as those affecting dividends and husband-and-wife companies. And in 2022, many in the contractor sector face a negative impact on net income from an increase in corporation tax, and an increase in National Insurance Contributions. To help mitigate the impact of these risks, contractors often take on the extra cost of building up a private financial buffer. Such buffers helped some contractors endure the covid-19 pandemic, during which government support for contractors was widely considered to be inadequate.
• Time away from family – contracting may involve staying away from your partner, and while some individuals may welcome the initial sense of change and freedom, regularly being apart from loved ones including your children, can take its toll.

Finally, don’t be deterred but factor in the financials

Much of the above might appear daunting. But for the 16 or so costs above, I know many a contractor who would shrug every one off because, they would say, wild horses could not drag them back to a permanent, full-time job working for somebody else!

So the above items of expenditure should not deter people from contracting. Instead, they should provide some idea of the possible costs likely to be incurred when becoming a contractor for the very first time.

For example, to take on an accountant to form a company and sort out your structure and registrations, with initial set-up advice too, budget around £360 including VAT. Or to have an accountant look after you and your company full-time (remember you’ll likely have a personal tax return to fill in, as well as a company tax return), budget between £800 and £1,500 a year. By totting up these sorts of costs – tangible and non-tangible, you can arrive at an informed decision that won’t come back to bite you, financially or otherwise!