Contractor vs Employee

Unsure if moving from employment to contracting is for you?

The security of a set wage is what keeps most people in permanent employment instead of contracting. In times of growing economic uncertainty, is there really such a thing as a secure permanent position anymore?

Moving from employment to contracting used to be a popular avenue for those forced into redundancy; nowadays, the trend has seen more people moving from permanent positions into contracting as their chosen working style. Our Contractor Attitude Survey reinforces this sentiment each passing year, with a shrinking minority of respondents stating redundancy as their reason for the move, and a growing majority citing a conscious choice to join the contracting world.

With regards to whether you can be a successful contractor in the current climate, results have found that 90% of those surveyed were either currently in a contract or were just about to start one and were, in fact, earning more now compared to when they were working as a permanent employee.

Of course with most things in life, there are both positives and negatives, and the same can be said of contracting. Here is a list of the advantages and downsides that come when making the move into contracting:

Advantages of Contracting

An average contractor rate can easily be double that of a full-time employee, or even more – as the client is not required to pay for your holiday, travel, sick pay, pension contributions or any employee benefits.
Unlike permanent workers, you are able to claim back on expenses that are made wholly and exclusively for the purposes of your business, and, as you only get taxed for your profits, this can lower your tax bill.
You have the freedom to work when you choose, where you choose and for however long you like.
The company that you work for is not your employer, but is instead your client, meaning you have far more control over your contract than what a permanent worker would have. This means that you will have a lot more flexibility and control over agreeing on working conditions and negotiating payment terms.
Taking a holiday will be a lot easier, as you will not be in the position of having to juggle your days off around other colleagues. You can also choose to have as much time off as possible, instead of the standard few weeks in a year.
Dealing with a variety of different clients will give you the ability to build up a wide-ranging skillset, CV and allow you to establish an extensive list of references.

A few downsides of Contracting

Of course, becoming a contractor never means that you are guaranteed work and so this is a factor that you must take into consideration. But as mentioned previously, this doesn’t seem to be much of an issue for the 90% of contractors surveyed in 2012 – to keep up to date with the latest contractor news, visit Caroola’s contractor news section, also for hints and tips for findings work as a contractor click here.
Contracting is an extremely rewarding way of working, but being your own boss does mean that you have a lot more responsibility than a permanent employee, which includes having to be in charge of your own finances. This can be worrying for some people, knowing what forms to fill out and when, but with the help of a good accountant, this won’t be an issue to be concerned about.

Independent contractor in the UK: What are my options?

There are two options recommended for contractors – to either trade through your own limited company, or through a PAYE umbrella company.

Any accountant will tell you that contracting through your own limited company is the most tax-efficient way of working. However, there will be a number of factors that will mean one will suit you better than the other. For example, if your contract is short term and less than £25,000, then you would probably be better off operating under an umbrella company. To see which way of contracting would suit you, read our comprehensive list below:

Limited Company

Advantages

The most tax-efficient way of working
You are able to claim on a much wider range of business expenses
Access to the Flat Rate VAT Scheme
You have complete control over your financial affairs and do not risk your own money and assets should anything go wrong
It’s not difficult running the financial side of your business – thanks to FreeAgent, you can submit and track your financial information via an online portal

Disadvantages

There is some paperwork involved, however, this shouldn’t take longer than 15-20 minutes a month, and a good limited company accountant will be able to help if you have any difficulties with this side of things
Not ideal for contracts less than £25,000 per year and can also be quite costly should you decide to contract for a short amount of time and then return to permanent work

Umbrella Company

Advantages

Ideal for short term contracts and contracts that are less than £25,000 per year
It’s very easy to use; you simply enter your timesheet and expense details, then just wait to be paid
All tax and NI is automatically deducted before you receive your money, just a permanent employee, meaning you won’t need to worry about having to pay any more tax
Someone else will be taking the burden of filling out paperwork
Ideal for people who are giving contracting a go for the first time and are unsure whether they want to stick with or go back into permanent work

Disadvantages

You will be relying on the umbrella company to collect your money from the client
It is the most expensive way of contracting. This is because it is still very similar to working as a permanent employee; as in you receive a salary that is subject to full PAYE tax and NI.

Contracting through your own limited company

Setting up your own limited company couldn’t be simpler. Firstly choose yourself a company name. Then form your limited company on our website, it takes just 5 minutes with your company formed within a few hours. We offer a fully inclusive formation package for just £135 + VAT which includes setting up a business bank account, registering your company for VAT and advice on the optimum share structure of your company.

Next, you will need to consider appointing an accountant. Sure you may be thinking do I need an accountant? Can I not just do the accounts myself? Well, you could, however, you have enough on your plate and the last thing you need to worry about is; missing a tax deadline, making sure that your tax submission is accurate or missing out on any opportunity to maximise your tax allowances.

Caroola offers all-inclusive fixed-fee accountancy packages. This includes:

Year-end accounts
Corporation tax
Payroll bureau
Dividend administration
Dealing with HM Revenue and Customs and Companies House
Quarterly VAT Calculations
Support with Annual Returns
Personal Taxation
Access to your own dedicated accountant for all help and advice
Free bookkeeping software, FreeAgent

Contracting under an umbrella company

With IR35 legislative reforms set for April 2021, contractors within the private sector (barring those contracting to small companies) will see the responsibility for determining the IR35 status of their engagements shift from themselves to the end hirer. There are concerns that this will see contractors being placed inside IR35 incorrectly; the use of an IR35 specialist to determine status is the most considered and fair option for both contractor and end hirer.

Contractors facing incorrect IR35 determinations have the option of the client led disagreement process, which gives the end hirer 45 days to respond to the contractors lodged dispute.

Remember that in reality, there will be little difference in take-home pay and you may wish to consider keeping your company open and operating the contract through the limited company while inside IR35. If you'd like to find out more about contracting under an umbrella company, visit the Parasol website here.