Having had some 15 years’ experience of working as a software contractor, I am often asked by developers who work as permanent employees (permies) about the pros and cons of working as a software consultant through my own limited company and whether the move would be a good one for them. Whilst it is possible to contract using other financial vehicles such as umbrella companies, this article will only consider limited companies as that is what I have experience of using.

Contracting or consultancy requires a different mind-set from being a permanent member of staff, and not all developers are capable of this shift in attitude.

Whilst you can look forward to an increase in the money you take home, there are real risks and expenses you would not normally be exposed to as a permie.

So let us have a look at the pros and cons:

Pros:

More money

There is no doubt that whilst you are working on contracts you will earn significantly more than you would as a permanent employee. Furthermore, working through a limited company is more tax efficient.

Less politics

You really have no need to involve yourself in office politics. When the end of the day comes you can go home and not think or worry about the power struggles within the company you are contracted to. Your career progression is not tied to the company.

Expenses from gross income

All your expenses of trading as a business will come out of your company’s gross income, i.e. before tax. This covers travelling expenses provided you have not been at the same client/location for more than two years, internet subscriptions, professional subscriptions, software, hardware, accountancy services and so on.

Cons:

Work is more transient

Contracts typically range from a couple of weeks to a year, although will most likely start at 3 months. However, most contracts are extended either because the project you have been brought in to help with takes longer to deliver than expected, the client decides they can use you on other aspects of the project, or the client decides they would like to use you on other projects.

The temporary nature of the work means that you will have down-time between contracts while you secure new opportunities during which time your company will have no income.

You may need to attend several interviews before securing a new contract.

Accountancy expenses

Your company is a separate entity and there are accountancy requirements which, unless you like paperwork, means your company will need to appoint an accountant to prepare your company’s accounts. It may also be worth purchasing some accountancy software, so talk to your accountant about this as they may prefer you to use a particular software package so they can integrate it with their systems.

VAT

You will need to register your company for VAT. This is tax neutral for you as the VAT you charge your clients you will pass onto the government less any VAT you are reclaiming from expenses, but it is additional paperwork to undertake each quarter. It is worth checking out the Fixed Rate VAT Scheme that is available, particularly after the initial expenses of setting up your company are over.

No training

Clients take you on based on your skills, not to train you when they will lose that investment at the end of the contract, so understand that it is unlikely you will receive any training funded by a client. However, learning new skills during a contract is possible and you may choose to accept a contract on a lower rate if this is guaranteed as it will help secure future contracts.

No financial extras

You will have no free pension, life, accident, sickness or medical insurance unless you choose to purchase them yourself. A financial advisor can give you all the necessary advice in this area, and it is worth taking seriously. A year after I started as a consultant I contracted a serious illness, this kept me off work for over two months, my client was very understanding and it could have been much worse, so it is worth considering what your options might be in the case of illness, death and retirement.

Agencies

Whilst it is possible to work directly for end clients there are pros and cons of working through an agency.  The main advantage is cash flow, you invoice the agency and they typically pay you within a week, whereas working directly for a client could have you waiting up to three months to be paid. The downside of working for agencies, especially in the current difficult times, is that they may go out of business and you then have difficulty getting the money you are owed.

Tax investigation

It is possible that the Inland Revenue may decide to investigate your company for compliance with tax law. Insurance is available to cover you for this. My personal recommendation would be to join the PCG as this insurance is included as a benefit of membership,

Professional Indemnity

Some agencies require that you are covered by professional indemnity insurance; this is a cost you would not incur as a permie.

Travel

Unless you live in an area that has an abundance of opportunities, such as central London, it is likely that you will be travelling further, longer and with more expense than if you were permanently employed at a local company. This not only affects you monetarily, but also your quality of life and the ability to keep fit and healthy.

Obtaining finance

If you want to secure a mortgage on a property it can be more difficult or expensive, especially if you do not have three years of audited accounts to show a mortgage lender.

Caveat

This post is my personal opinion and should not be used as a definitive guide or recommendation to contracting and whether it is suitable for you as an individual, i.e. I accept no responsibility if you decide to take up contracting based on this post and you fare badly for whatever reason.