Contracting – why it might be a good choice for you

Working dads with well developed skills who are looking to earn good money without the commitment of permanent employment might wish to consider contracting. It can be the perfect work choice for men and women who want to ensure a good family/work balance, as it allows people to only take on contracts outside school holidays.

Contractors can be found in all sectors and across most disciplines. So, if you are a qualified engineer, scientist or statistician, or have professional management skills, there are likely to be contracts out there with your name on them.

What is contracting?

Contractors are typically highly skilled flexible workers who usually work for a single client, full-time, on a specific project for a limited time, often about three months. They typically work either as limited company contractors – running a small business on their own or with a spouse or civil partner – or as employees of an umbrella company that allows them to work without having to run their own business.

As a contractor, you’d usually be working onsite on a specific project lasting anything from one month to two years. Your company would bill for your services – the average annual salary is around £57,500,  but rates can vary from up to several hundreds or even a thousand or so pounds a day. It all depends on your skills and market demand.

Contractors are not freelancers, who usually work with multiple clients simultaneously on mainly small and short jobs. Nor are contractors consultants, charging by the hour or day, and possibly on a retainer, advising clients rather than performing tasks. And contractors are definitely not temps, possibly doing a few days here or a week there.

Trading as a contractor

If you choose to go contracting, you must either incorporate your own limited company or join an umbrella company. Sole traders are unlikely to win contracts, because clients and agencies are afraid they might become liable if sole traders don’t pay taxes, or that sole traders might later claim employment rights.

Starting and running your own limited company is inexpensive and easy. Or if you join an umbrella company, it’s like temporarily borrowing someone else’s company to use during your contract.

Earning more through contracting

One of the reasons you earn more as a contractor is tax efficiency. If you use a limited company, you are paid contracting fees. These are subject to 20% corporation tax [see https://www.gov.uk/government/publications/rates-and-allowances-corporation-tax], and you pay yourself a tax-free salary up to your personal allowance of £11,850. Then you pay the balance as dividends with no additional tax, unless you exceed the higher rate threshold. Plus, you can charge all your business expenses to your own company, further reducing the tax you pay.

If you use an umbrella company, you pay tax under the Pay As You Earn (PAYE) scheme, but can also offset your expenses against tax, leaving you better off than a regular employee, but generally not as well off as a limited company contractor.

Contrast this with employment income, where under PAYE you not only pay basic rate income tax, but also employee’s National Insurance on most earnings.

It’s not all good news…

But there is a ‘catch’. To benefit most from increased pay and reduced taxes, you need to contract as a limited company contractor. And to do that, you have to be a genuine business. Not all are – to the taxman, some are ‘disguised employees’.

Enter something called ‘IR35’ – legislation used to tax as employees ‘disguised employees’ who use their limited companies purely for tax reasons. IR35 has become a huge political football of late, with changes beginning in the public sector, making employers liable for deciding a person’s tax status, and concerns being expressed about decisions on who is being labelled a disguised employee. IR35 is expected to be rolled out across the private sector from April 2020.

Are you a contractor looking for opportunities? Our recruitment consultancy division is working with organisations recruiting consultants now. Click here to find out more.

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