Contracting in the UK

Moving overseas to a contracting role in London? We’ve got you covered with our definitive PennyBooks guide to getting set up successfully and stress-free.

If you’ve recently moved or are thinking about moving to the UK as a contractor, then this guide will help you navigate:

  • Daily rates – what to expect
  • Recruiters – where to find them and how to make them work for you
  • How the tax works
  • What is IR35?
  • Do I need insurance and where can I get it?
  • Limited companies and your responsibilities
  • What you can do before you arrive
  • Contracting pitfalls

We have written this guide for anyone working or thinking about working as a contractor through their own Limited Company. We have not included any information or comparisons of choosing to work via an Umbrella company which is another popular choice for contractors to work through. Our rule of thumb is that if you are earning over £30,000 per year, then it is probably worth doing it through a Limited Company as opposed to an Umbrella to maximise the tax efficiency and hence your take-home pay.

NB: to earn the £30,000 your daily rate will need to be at least £125 per day. If you are below this then you should consider working through an Umbrella company which may be a more effective structure for your circumstances. (See the note at the bottom of this post which explains Umbrella Companies in more detail).

What type of daily rate can I expect?

This depends on the industry you’re in, where you’re providing your services (London is often 25% higher than the rest of the UK), how experienced you are, and how desperate the client is to get you.

If you’re a finance professional moving to the UK from overseas and recently qualified then you can expect your first contract to be paying you between £250 and £275 per day. Recruiters will add their cut (typically between 12% and 20%) on top of this, which you don’t see. We have strategies on how to maximise your rate later.

As we said, rates are highly dependent on your situation so best to do your research here; some resources are below.

If you are moving to the UK for the first time, especially if you’re moving into London, then we recommend that you take time to find a good role which will give you CV building experience. You may sacrifice some pay in the short term but it will make you a more attractive employee for future contracting roles, and there is no reason why that after 6 months you shouldn’t be receiving a pay rise of up to 30% on your first role if you pick the right situation.

Our final point is that when working for daily rates, you will miss out on the other benefits of being employed, including, pension schemes, sick leave, holiday pay and other benefits that come with employment. Your daily rate may be higher than when employed but if you don’t work you don’t get paid.


Recruiters will help you get into work, most roles we see in the contract market are recruited via an external recruiter.

Recruiters need to charge for their services, and they will take a cut of what the client is offering to pay for the role before you get paid the rest. Here’s an example:

To illustrate how the whole contracting process works we’re going to use an example throughout this guide. Ray is searching for his first role since moving to London from overseas, he is a fully qualified accountant from the Big 4 and has been told by his recruiter that he can expect to earn £275 per day.

A recruiter finds a management accountant role where the client is willing to pay £330 per day, sends Ray off for an interview and he gets the job. Congratulations Ray, you’re now earning £275 per day, and the recruiter is taking home £55 per day, for every day that you work in that contract. If you stay six months, then the recruiter makes circa £7,000 for your hard work. There are strategies that you can use to maximise your returns to ensure you’re not being exploited too heavily by the recruiters.

This is a typical and not extreme example, we have seen contractors paid £275 per day where the client was paying £410. That means the recruiter is making £135 per day off their work. That’s £16,200 over six months!

Now, we’re not saying that recruiters are bad, they are great at getting you into roles and if you’re from the Big 4 (or a large Law Firm), like Ray, they will treat you as hot property but always keep in mind that they are out to maximise their returns which often comes at your expense.

This is because generally in large companies a role is signed off for a certain daily rate by the client before it goes to recruiters, the client tells the recruiter how much they can pay for the position and the recruiter doesn’t tell you. Here’s a quick summary of our example for Ray:

Client offering £330 pay’s the daily rate to the recruitment firm

Recruiter receives the £330 payment from the client for Ray’s services

Ray’s rate is £275 and recruiter pays Ray the agreed rate

Recruiters margin is £55    

As we’ve said, recruiters aren’t bad and here are some of our recommendations you should look to sign up with.

This is just a few of them as Recruiting is a huge industry in London, it’s very competitive and they will most likely tell you that you should only sign up with three recruiters at a maximum, they would even like to keep you as an exclusive candidate. Our advice is to sign up with as many as you want to; they often don’t have the same roles as most employers only deal with one or two recruitment firms. So to get the best possible role for yourself you don’t want to be limited by the number of potential jobs coming in our advice is to be aggressive here.

Our last point on recruiters is to be wary when they are recommending accounting firms to you, they are often receiving kickbacks for doing this, and we have seen examples where they receive up to £500 if you sign up with the accountant on the recommendation of the recruiter. That means, depending on how much your accountant is charging you, your first six months of fees are being passed straight onto your recruiter who is already taking £65 – £135 per day from your services.

PennyBooks contracting services do not make any payments to recruiters if they recommend us to you.

How does tax work?

Or more precisely how much does Ray make when he’s getting paid £275 per day? Our rule of thumb here is that you need to keep a minimum of 25% in the business for tax and other business expenses but detailed below is an example of what to expect.

Ray Limited makes profits (pre Ray’s salary) of £70,000 for the year to 31 March 2020. Ray, the only shareholder wants to extract the maximum amount of cash that he can.

Company – Ray Limited £
Profits £70,000
Salary (£8,632) (£8,632)
Company Profit £61,368
Corporation tax (19%) £11,660
Net Profit After Tax £49,708
Ray – personal  
Salary    £8,632
Dividend £49,708
Total income £58,340
Personal allowance £12,500
Taxable income £45,840
Income tax  
Salary – personal allowance used    £0
Dividend allowance (£2,000 @ 0%) £0
Remaining personal allowance (£3,868 @ 0%)   £0
Basic rate dividend (£37,500 – £2,000) @ 7.5% £2,663
Higher rate dividend (£8,340 @ 32.5%) £2,711
Total tax liability £5,374
Final picture (Ray Limited + Ray)  
Total income before tax £70,000
Less: Corporation tax (£11,660)
Less: Personal tax (£5,373)
Net Income to Ray      £52,967

In the example above, we have set it up so that the salary you pay yourself is low enough so that you don’t pay any National Insurance contributions. On a normal full-time salary, on earnings above £166 per week, both the individual and the Limited company will have to pay National Insurance contributions, which usually means that a full-time employee pays a higher amount of tax compared to a contractor.

Comparisons to a salary – there is no comparison here. Not only do roles pay less when you take a full-time position, but they are also taxed more. Depending on the industry and profession you work in we think that a full-time position earns you around 20% less take-home pay as the same job title when you’re a contractor. Again, this changes depending on the profession and industry that you work in.   

What type of insurance do I need?

Most of the contracts that you work under will stipulate the exact insurance that you need but mostly this is limited to professional indemnity insurance, and this and the other common forms of business insurance are detailed below. This may seem strange to you if you are moving from overseas but this is standard practice in the UK.

Professional indemnity – covers you in case you make a mistake when performing your services for the client. Examples of what you’re covered for include, copyright breach, negligence and data breaches. The PI insurance covers you for any professional costs incurred on the claim, and for any amount you’re liable to pay to the client. Typically PI covers you for up to £1m per claim.

Public Liability – in case, as a result of your actions a member of the public is injured or property is damaged. Typically insurers cover you for up to £5m per claim.

Employers liability – in case one of your workers is injured or dies as while working for the company. This type of insurance is mandatory for all businesses in the UK. However, if you are the sole employee of your company, and own greater than 50% of the shares, you don’t have to take out EL cover. Typically insurance is taken out for £10m per claim.

The contractor’s insurance market, like the recruitment market, is well established and competitive. You will find that you can take out a bundle of insurance which covers you for the things you want. Buying the insurance as a package is usually cheaper and easier than getting specific cover for each type.

The two sites below are fantastic resources for comparing prices across different policy options with different providers.

What is IR35?

We’re providing a quick reference guide on IR35 in this post, if you want our definitive guide on IR35 including the latest on the upcoming changes in the Private sector, then you can find it here.

IR35 is a set of rules enacted into law in 2000 which aims to tackle tax avoidance by workers supplying their services to clients who would otherwise be taxed as an employee.

If you provide your services to a third party client through a Limited Company, then you should review IR35 for every contract you undertake, including renewals. It is possible for you to be ‘inside’ IR35 on one contract and ‘outside’ IR35 on another depending on the arrangement.

What does this mean?

If the IR35 rules are deemed to apply to the contracting arrangement that you are working under, it means that you will be taxed as an employee, i.e. you will pay more in tax and a lot more in National Insurance.

If you are ‘outside’ of IR35, then it means that you won’t be taxed as an employee and you get all of the benefits described in the tax section above.

Who decides if the IR35 rules apply to your contract?

You as the director are ultimately responsible for the decision on whether the rules apply to your contract. As a part of our service at PennyBooks, we do offer free IR35 reviews to all clients.

This is a danger area because if you decide that you are operating outside of IR35 but HMRC does a review and deems you inside then they will likely charge you interest and penalties if you have not carried out a review or have ignored the rules.

What are the IR35 rules?

Three criteria must be present for IR35 to apply:

  • You personally perform services for the client
  • The services must be performed through an intermediary company (like your Limited Company) rather than you contract directly with the company in your name
  • The arrangement must be such that the contractor would have been treated as an employee were they to have contracted directly.

The main factors considered when deciding the third point are above are:

  • Part and parcel – are you part of your clients’ organisation? Here, HMRC will look at whether you receive any of the same benefits of that of their employees being gym access, office parties, business cards, pension or bonus scheme.
  • Substitution – can you provide a substitute contractor to do the work? Although the majority of contractors may never exercise it, the right to substitute the work to someone else must be a genuine one.
  • Exclusive services and length of engagement – if a contract explicitly states that you are not allowed to supply services to another client then HMRC is likely to deem that it is a contract for employment.
  • Contract ‘for service’ versus ‘contract for services’ – an employee works under a ‘contract for service’ whereas a contractor works under a ‘contract for services’
  • Do you have more than one client?
  • Can you choose the hours you work?
  • Do you or the client provide the materials which you use to work?
  • Length of notice periods – an employee would be given the right to statutory notice period on termination of their employment. HMRC see notice periods as being indicative of employment; however, a reasonable notice period is considered defendable.

It is the responsibility of you as the director to assess each contract and whether you sit inside or outside of IR35. The consequences for getting this wrong can be severe as HMRC will charge interest and penalties onto any underpaid tax amounts.

Your responsibilities as a director

This guide is assuming you will be working via a Limited Company so you will need to set up the below:

  • Register a Limited Company through Companies House
  • Register for taxes through HMRC
  • Setup a company bank account – PennyBooks have partnered with TIDE so you can set up and a company bank account in minutes, even if you’re outside of the country.

PennyBooks can do all of this for you, even if you’re currently outside of the UK, so please let one of our team know here.

Your ongoing responsibilities as a director:

  • Keep company records – you must keep accounting records for six years, including:
    • All money received and spent by the company
    • Details of assets owned by the company
    • Debts the company owes or is owed
    • All receipts and invoices for costs incurred by the company
    • All other relevant documents, including bank statements and correspondence.
  • Tax responsibilities
    • Annual tax return calculation and filing
    • VAT returns (now including making tax digital – see our blog post on this here)
    • Self-assessment
    • PAYE submissions and payments, including, National Insurance
    • Dividend income and paperwork
  • Companies House – you’re also responsible for maintaining your information with Companies House, including:
    • Changing your companies registered office
    • Your business contact details change, for example, your name, business name or addresses.
    • You appoint an accountant or tax advisor
    • Confirmation statement (annual return)

Contracting Pitfalls

The biggest pitfall we see is contractors not leaving enough cash in their companies to pay their taxes when they fall due; it is easy to go out and spend and forget that in 12 months HMRC will come knocking for your taxes owed. If you sign up with PennyBooks, we will be in touch with you quarterly to ensure you’re aware of what tax bill to expect, based on your income we will provide an estimate, and when you will need to have the money to pay it by.

IR35 is another problem area, if you as the director of your company have not considered the effects of these rules and an HMRC tax inspector opens up an investigation into your affairs then the consequences can be dire as they will add interest and penalties, of up to 100% of your tax shortfall, to the tax bill they give you. We recommend that you request an IR35 review from us each time you take on a new contract.

What can I do before I get to the UK?

Sign up with PennyBooks – there’s lots we can do for you before you get here and we won’t start charging anything until you are working; we can help you with:

  • Setting up your Limited Company
  • Advise on dealing with recruiters and searching for work
  • Getting a bank account – we’ve partnered with TIDE so that you can have a bank account setup prior to arriving in the UK
  • Having a registered office

In addition to the above, obviously, we also recommend that you have an updated CV and that in the month before moving to the UK that you start sending your CV onto the recruitment firms that you want to start working with.

Umbrella Company

Umbrella companies are agents between you as the contractor and your client who you are working for. You will provide services to the client and the client will pay your Umbrella Company which will deduct tax, national insurance and their fees and then pay the balance over to you. It is a simple structure but may leave you with less take home pay if you’re a high earner. Also, if you act via and Umbrella Company then be prepared for payment delays as your Umbrella Company will often only pay you after they have been paid by your Client, introducing more touch points until the cash reaches you can often increase the time to get paid.


Book a call with one of our directors today to discuss your best options for contract work

James Watson