How to Start Contracting in the UK: Insurance, IR35 & Setup

Introduction

Contracting can be a smart way to increase earnings, gain flexibility, and work on varied projects. But in the UK, getting set up properly matters. From choosing the right trading structure to understanding IR35, and arranging the right insurance, a clean start helps you win better clients and avoid nasty surprises.

This guide walks you through the core steps to start contracting in the UK, with a clear focus on insurance, IR35, and practical setup.

1) Decide what type of contractor you are

“Contractor” can mean different things. Before you do anything else, be clear on your working model:

• Limited company contractor (PSC): You work through your own Personal Service Company (PSC) and invoice clients.

• Sole trader: You trade in your own name and pay tax through Self Assessment.

• Umbrella company: You become an employee of the umbrella; they invoice the client/agency and pay you via PAYE.

Quick pros and cons

• Limited company: Often preferred by experienced contractors and some clients; more admin; IR35 considerations.

• Sole trader: Simple setup; less admin; can be less “corporate” for some clients; liability sits with you.

• Umbrella: Fastest to start; less control; umbrella fees; PAYE deductions.

If you’re unsure, speak to an accountant who understands contracting. The right choice affects tax, compliance, and the insurance you’ll need.

2) Choose your route: Limited company, umbrella, or sole trader

Limited company (PSC) basics

If you go limited, you’ll typically:

• Incorporate a company at Companies House

• Open a business bank account

• Register for Corporation Tax

• Set up bookkeeping and payroll (even if you only pay yourself)

Limited companies can look more credible to some clients, and they can be useful for ring-fencing liability, but they come with ongoing responsibilities.

Umbrella company basics

Umbrella companies are common for short-term roles or when you need to start quickly. You’ll usually:

• Sign an employment contract with the umbrella

• Submit timesheets

• Get paid via PAYE (with tax and NI deducted)

You still need to check insurance expectations (some umbrellas provide certain covers, but don’t assume—confirm in writing).

Sole trader basics

Sole trader setup is straightforward:

• Register for Self Assessment with HMRC

• Keep records of income and expenses

• Consider a separate bank account (not mandatory, but sensible)

Sole traders can still need insurance, especially if a client contract requires it.

3) Understand IR35 (and why it matters)

IR35 is the UK’s off-payroll working legislation designed to stop “disguised employment”. In simple terms, it looks at whether you’re genuinely in business on your own account, or effectively working like an employee.

Why IR35 affects your contracting setup

• If you’re inside IR35, your income is taxed more like employment income.

• If you’re outside IR35, you’re treated more like a genuine independent business.

Who decides your IR35 status?

This depends on who you’re working for:

• Medium and large private sector clients (and public sector): the client typically determines status.

• Small private sector clients: the contractor may determine status.

What IR35 status is based on

Status is not just about what the contract says—it’s also about working practices. Common factors include:

• Control: Who decides how, when, and where the work is done?

• Substitution: Can you send a suitably qualified substitute?

• Mutuality of obligation (MOO): Is the client obliged to provide work, and are you obliged to accept it?

• Financial risk: Do you correct defects in your own time? Do you invest in equipment?

• Integration: Are you treated like staff (line management, staff benefits, internal roles)?

Practical IR35 tips

• Keep contracts clear on substitution, control, and deliverables.

• Align working practices with the contract.

• Keep evidence: emails, SOWs, project plans, invoices.

• Consider professional status reviews for higher-value roles.

4) Get your contracting paperwork right

Strong paperwork helps you win work and reduces disputes.

Key documents to prepare

• Contract / Statement of Work (SOW): deliverables, timelines, acceptance criteria.

• Terms of business (if direct): payment terms, late payment clauses, liability limits.

• Data processing agreement (if handling personal data): especially for GDPR.

• NDA (if required): for confidentiality.

Payment terms and cashflow

Contractors often fail because of cashflow, not lack of work. Make sure you:

• Invoice promptly

• Agree payment terms upfront (e.g., 14 or 30 days)

• Track overdue invoices

5) Essential insurances for UK contractors

Insurance is one of the quickest ways to look professional. Many clients and agencies require it before you can start.

5.1 Professional Indemnity Insurance (PI)

What it covers: Claims arising from professional negligence, mistakes, errors, omissions, or poor advice/services.

Who needs it: Most consultants, IT contractors, engineers, designers, marketers, and anyone providing advice or professional services.

Typical client requirements: PI limits often start at £1m, sometimes £2m or more depending on sector.

Common examples:

• A software bug causes a client outage and financial loss.

• A consultant’s recommendation leads to a failed project.

5.2 Public Liability Insurance (PL)

What it covers: Injury to third parties or damage to third-party property arising from your business activities.

Who needs it: Contractors who visit client sites, work on premises, or interact with the public.

Common examples:

• You spill coffee on a client’s laptop.

• A visitor trips over your equipment during a site visit.

5.3 Employers’ Liability Insurance (EL)

What it covers: Claims from employees who are injured or become ill due to their work.

When it’s required: If you employ staff. Some limited company contractors may need it if they have employees (including certain arrangements with helpers). If you’re unsure, get advice—this is a compliance area.

5.4 Cyber Insurance (increasingly relevant)

What it covers: Data breaches, cyber extortion, incident response costs, business interruption, and liability.

Who needs it: Contractors handling personal data, client systems, payment data, or sensitive commercial information.

Why it matters: Even small contractors can be targeted, and clients increasingly expect cyber hygiene.

5.5 Tools, equipment, and portable electronics cover

If you rely on laptops, test equipment, cameras, or specialist tools, consider cover for:

• Theft (including from vehicles, where permitted)

• Accidental damage

• Worldwide cover (if you travel)

5.6 Contractual liability and “fit for contract” insurance

Some contracts include tough liability clauses. Your insurance should match your contract obligations where possible.

Tip: Don’t sign a contract with unlimited liability and assume insurance will fix it. Review liability caps, indemnities, and exclusions.

6) How much insurance do contractors need?

There’s no one-size-fits-all, but you can use these practical benchmarks:

• Professional Indemnity: £1m–£2m is common; regulated or high-risk work may need more.

• Public Liability: £1m–£5m is common depending on site access and client requirements.

• Cyber: limits vary widely; start with realistic incident response and liability needs.

Your best guide is:

1. Client/agency contract requirements

2. Your risk exposure (project value, sector, data sensitivity)

3. Your appetite for risk

7) Tax, accounting, and financial setup

Get an accountant who understands contractors

A good contractor accountant helps with:

• Payroll and dividends (for limited companies)

• VAT registration (if relevant)

• Expense rules and record keeping

• IR35 guidance

Separate your finances

Even if you’re a sole trader, keep things clean:

• Use a dedicated bank account

• Track expenses with receipts

• Set aside money for tax

VAT: do you need it?

VAT can be complex. Some contractors register voluntarily for credibility or cashflow reasons, but it depends on your turnover and clients. Get tailored advice.

8) Compliance and risk management (simple but important)

Contracting is still a business. A few basics reduce risk:

• GDPR: If you process personal data, understand your responsibilities.

• Information security: Use MFA, encryption, secure backups.

• Health & safety: If you work on-site, follow site rules and risk assessments.

• Regulated work: If your sector has specific rules (finance, medical, construction), align early.

9) Finding work: agencies vs direct clients

Agencies

Pros:

• Faster access to roles

• Less sales effort

Cons:

• Less control over rates

• More compliance checks

Direct clients

Pros:

• Higher margins

• Stronger relationships

Cons:

• You handle sales, contracts, and credit risk

Either way, having insurance and a professional setup helps you move faster when a role comes up.

10) A simple “first 30 days” contractor checklist

Use this as a practical starting point:

1. Choose your structure (PSC, umbrella, sole trader)

2. Speak to a contractor-friendly accountant

3. Set up bank account and bookkeeping

4. Draft a simple contract/SOW template

5. Arrange Professional Indemnity and Public Liability insurance

6. Confirm any client-required limits and clauses

7. Set up invoicing and payment tracking

8. Create a basic website/LinkedIn profile positioning

9. Build a CV focused on outcomes and deliverables

10. Start outreach to agencies/direct clients

FAQs: Starting contracting in the UK

Is contracting worth it in the UK?

It can be, especially if you have in-demand skills and you manage tax, cashflow, and compliance properly. The key is to treat it like a business.

Do I need insurance to be a contractor?

Often yes. Many agencies and end clients require Professional Indemnity and Public Liability as a minimum.

What is IR35 in simple terms?

IR35 is a set of rules that assesses whether you’re genuinely self-employed or effectively working as an employee through a company.

Can I be a contractor without a limited company?

Yes. You can contract via an umbrella company or as a sole trader, depending on the role and client requirements.

What insurance do IT contractors need?

Typically Professional Indemnity and Public Liability. Cyber insurance is also increasingly relevant if you handle client data or systems.

What happens if I’m inside IR35?

Your income is taxed more like employment income, and your take-home pay may be lower than outside IR35 arrangements.

Do contractors need Employers’ Liability insurance?

If you employ staff, yes. Some arrangements can be a grey area, so it’s worth checking with a broker or adviser.

How quickly can I start contracting?

With an umbrella company, you can often start quickly. Limited company setup can also be fast, but you’ll want your admin and insurance in place.

Final thoughts

Starting contracting in the UK is absolutely doable, but the best outcomes come from getting the fundamentals right: choose the right structure, understand IR35, use clear contracts, and protect yourself with the right insurance.

If you want to move quickly, focus on being “client-ready”: professional paperwork, correct insurance, and a setup that makes compliance easy for agencies and end clients.