Why contracting might be the right choice for you
Working mums 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 women and men 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 human resources, management or marketing 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 – usually upwards of £25 per hour/£250 per day, 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, and you pay yourself a tax-free salary up to your personal allowance of £8,105. 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 20% basic rate income tax, but also employee’s National Insurance at 12% on earnings up to £817 each week, and 2% thereafter.
It’s not all good news, but the downsides aren’t huge
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. But IR35 is possibly the only blot on an otherwise attractive and easy-to-navigate contracting landscape. And it’s relatively easy to avoid IR35, as long as you’re genuinely in business and follow some straightforward guidelines.
So, if you have transferrable skills, can devote one or more months at a time to work, and fancy the idea of only having to be in work when you choose to be, contracting may well be a good option for you to explore.
*Dave Chaplin is CEO of ContractorCalculator.co.uk. He has lived and breathed contracting since he first took the plunge and became a professional contractor in 1997. Dave then spent seven years working as an IT contractor in the City of London on critical, cutting edge IT infrastructure and development projects for global players. Since launching ContractorCalculator in 2004, Dave has consulted with the Department for Business, Innovation and Skills (BIS), HM Treasury and HM Revenue and Customs on the future of IR35 and on tax simplification. He has become a contracting guru influencing new generations of contractors through ContractorCalculator.