Why redundancy is a natural moment to contract
Three factors line up. First, redundancy provides a lump sum that covers the income gap while you find the first contract. Second, your professional network is freshest in the weeks immediately after redundancy, which is when most first contracts come through introductions. Third, you have time to set up properly (company formation, accountant, IR35 briefing) rather than scrambling.
The downside is the loss of structural stability. Contractors generally don’t get sick pay, paid holiday, pension contributions from a client, or employment protection. The higher day rate compensates, but it’s a different shape of income. If predictability is what you value most, a return to a permanent role is probably the right call.
The financial picture
A typical mid-senior UK contractor day rate sits between £300 and £700 outside London, and £500-£1,200 in central London or fintech-heavy roles. The headline figure looks high compared to a permanent salary because it has to cover gaps between contracts, no paid leave, no pension contributions from clients, and any training you’d previously had paid for. A reasonable rule of thumb: contractor day rate × 200 days = roughly equivalent to a permanent salary including benefits.
Once you’ve worked out a target day rate, the calculator isn’t complicated. 200 billable days × £500 = £100,000 gross revenue into your limited company. From that, you pay corporation tax (currently 19-25%), then take dividends and a small salary to pay yourself. After tax, you’re typically looking at 60-70% of revenue as take-home, depending on your structure and IR35 status.
Step 1: form the limited company
Almost all UK contractors operate through a limited company. The reasons: tax efficiency for outside-IR35 work, separation of personal and business liability, and the credibility that clients expect. Forming a company takes 24 hours and costs under £100, including the Companies House fee.
You can do this directly on the Companies House website or through a formation service. Formation services handle the paperwork, registered address, share structure, and basic compliance set-up in one go. For a contractor expecting to spend their time billing clients rather than reading Companies House forms, this is usually worth the small fee.
Step 2: find a contractor-specialist accountant
Generalist accountants can handle a contractor limited company but specialists are usually faster, cheaper, and better at the specific things contractors need (IR35, expenses, tax- efficient remuneration, VAT thresholds). Specialist contractor accountancy fees sit around £100-£150 per month and bundle Companies House filings, corporation tax, VAT returns, payroll, and director self-assessment.
Onboarding takes about a week. Have your company number, UTR, and basic personal details ready. Most specialist firms include software (FreeAgent or similar) in the monthly fee. The software handles invoicing, expenses, and mileage; the accountant handles the year-end and statutory filings.
Step 3: understand IR35 before signing anything
IR35 is the rule that decides whether a contract is genuine self-employment (outside IR35) or disguised employment (inside IR35). Inside-IR35 contracts are taxed via PAYE on the contracted day rate, just like a salary; the tax efficiency of the limited company disappears. Outside-IR35 contracts let you take advantage of dividend tax rates and corporation tax.
Since April 2021, medium and large clients determine IR35 status for the contract; small clients (under specific size thresholds) leave it to the contractor to determine. Either way, you need to know your status before accepting a contract. The financial difference between inside and outside is roughly 20-25% of net take-home for most rates, so it matters. Specialist accountants and IR35-review services help with edge cases.
Step 4: find the first contract
Most first contracts come through three channels: existing network (ex-colleagues moving to new employers, people who know your work), specialist contractor agencies for your sector, and direct outreach to companies you know need your skills. Job boards are usually the lowest-yield channel for experienced contractors.
Realistic timelines: existing network can produce a contract in 1-4 weeks; specialist agencies take 4-8 weeks for the first placement; cold direct outreach 6-12 weeks. Most contractors land their first contract through a mix of all three.
The first invoice
The first time you raise an invoice from your limited company is a small moment but a real one. Standard payment terms in UK contracting are 30 days, sometimes 14 days through agencies (who in turn wait 30 days from the client). So plan for your first invoice paid roughly 6-8 weeks after you start the first contract. That’s why the redundancy lump sum matters: it covers the gap.
Related
- Going freelance after employment
- Setting up a limited company after leaving work
- Freelance setup checklist
- Self-employment after leaving a job
- Surviving redundancy financially
- Redundancy pay calculator
Frequently asked questions
- Should I become a contractor after redundancy?
- Contracting often pays better per hour but trades stability for variability. If you've been made redundant from a contract-friendly sector (technology, finance, engineering, life sciences) and have specialist skills, the contracting market is usually accessible. If your background is purely permanent-employee operational, contracting is harder to break into without proof of independent delivery.
- Limited company or umbrella for contracting?
- Limited company gives the most control and best tax efficiency for outside-IR35 work, but adds admin (accountant, annual accounts, corporation tax, VAT if applicable). Umbrella companies handle the admin and treat you like an employee for PAYE; they're simpler but less tax-efficient and only really make sense for short or inside-IR35 contracts.
- What is IR35 and does it matter?
- IR35 is HMRC's anti-avoidance rule for off-payroll working. Since April 2021, most clients (not the contractor) determine IR35 status. Inside-IR35 means the contract is effectively employment in tax terms and pay is taxed via PAYE. Outside-IR35 means you're genuinely independent and your limited company pays corporation tax instead. The financial difference is significant.
- How long does it take to start contracting?
- From scratch: limited company can be incorporated in 24 hours, a business bank account opens in 1-3 days, an accountant can onboard you in a week. Finding the first client is the longer step; budget 4-12 weeks depending on your network and sector. Existing contacts shorten this significantly.
General information about contracting in the UK. For tax and IR35 advice specific to your circumstances, contact a contractor-specialist accountant or HMRC.
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