Going Contracting for the First Time: A Starter Guide

Last updated June 2026

Thinking about leaving permanent employment to contract? It can pay significantly more, but the money works differently and there’s a learning curve. This guide walks a first-time UK contractor through the decisions that matter, in the order you’ll face them.

1. Understand that a day rate isn’t a salary

The first shock is that a £500/day contract is not the same as a £130k job. Your rate has to cover the things a salary hides: paid holiday, employer pension, sick pay, gaps between contracts and employer’s National Insurance. As a rough rule, a contractor needs a higher headline figure than the equivalent salary just to break even on benefits. Always compare roles on take-home pay, not gross — our day-rate calculator makes that easy.

2. Find out your IR35 status

Before anything else, work out whether the contract is inside or outside IR35. For medium and large clients, the client must tell you via a Status Determination Statement. This single fact shapes how you should get paid:

• Outside IR35 → your own limited company is usually most tax-efficient.
• Inside IR35 → an umbrella company is usually simpler and the tax advantage of a limited company largely disappears.

If you’re unsure what IR35 even is, start with our plain-English IR35 guide.

3. Choose umbrella or limited company

This follows naturally from your IR35 status and how long you plan to contract:

• Umbrella — zero admin, instant setup, you’re employed and paid via PAYE. Best for inside-IR35 work, short contracts, or anyone who wants simplicity.
• Limited company — more admin and an accountant, but the highest take-home outside IR35, plus control over expenses and timing.

Our umbrella vs limited guide covers the trade-offs in detail.

4. Set a sensible day rate

Research what your skills command — recruiters, job boards and peers are your best sources. Then sanity-check it: a blunt rule many contractors use is desired salary ÷ 1,000 ≈ minimum day rate, going higher to cover lost benefits and billing gaps. Don’t undersell early; raising a rate mid-relationship is harder than starting firm.

5. Sort the essentials

Whichever route you pick, line up:

• A business bank account (for a limited company).
• An accountant if going limited — budget £100–£150/month; they’ll handle accounts, payroll and deadlines.
• Insurance — professional indemnity and public liability are often contractually required.
• A buffer — aim for a few months of expenses saved, because contract income is lumpy.

6. Set expectations on take-home

Depending on rate, IR35 status and how you’re paid, contractors typically keep somewhere in the region of 55–75% of their gross contract value after tax. Outside IR35 through a limited company sits at the higher end; inside IR35 through an umbrella sits lower. Run your real numbers before you hand in your notice — the calculator gives you a clear picture in seconds.

7. Plan for the things employees don’t think about

As a contractor you are your own safety net. Build in:

• Pension — no employer is auto-enrolling you into a generous scheme, so set up your own (employer contributions from a limited company are very tax-efficient — see our pensions guide).
• Time off — every day off is an unbilled day, so price holidays into your planning.
• Tax set aside — keep money back for corporation tax, dividend tax and Self Assessment so deadlines don’t sting.

The takeaway

Contracting can be genuinely rewarding, financially and professionally, but it rewards preparation. Understand your IR35 status, pick the right pay structure, set a confident rate, and model your real take-home before you leap. Do that, and the move from permanent to contract becomes a calculated decision rather than a gamble.

General information for the 2025/26 tax year, not personal advice. Speak to a contractor accountant about your specific situation.