Contractor vs Employee
Employee or contractor? If you’re weighing up whether to take the plunge and begin working for yourself, we can help.
There’s never been a better time to be a contractor. Due to a number of tax breaks, you can now make substantially more money, pound for pound, than a permanent employee doing the same type of work. Taking the time to do the sums and weigh up contractor rates versus salary will often offer a very convincing argument for the self-employed life!
Frequently Asked Questions
Why do contractors tend to earn so much more than employees?
The reason that contractors usually earn much more than an employee is that employers have to pay certain taxes and insurance on each worker, which, from the outset, dents the amount they offer to the employee as a gross salary. You must pay tax whether you’re a contractor or employee, but the final amounts asked of you differ significantly.
A contractor with a limited company enjoys tax breaks, in part to offset the considerable personal and financial risk that comes with running your own company.
For instance, employers pay their own National Insurance on each employee as well as the employee making their own N.I. contribution. As a contractor, you only have to pay National Insurance once and, if you run a limited company and pay yourself a small salary, the total tax you pay is much less than if you were part of an employee PAYE scheme.
What does a contractor have to do that an employee doesn’t?
As a contractor you must take on the responsibility of staying on top of your taxes, insurance and expenses yourself. This needn’t be a problem, it just requires a certain amount of admin and understanding of how to manage your gross income to its best advantage.
Among the contingency payments you need to plan for are sick pay or, income protection insurance. If you are a contractor, self employed, or freelancer working on a fixed term contract, you need to put aside money for the kind of things that a traditional employer takes care of automatically. Sick pay insurance ensures that up to 100% of your income is protected in the event that you should fall ill.
Why do so many workers defect from employed work to contract work?
In a word: freedom. Yes, contracting requires a great deal of organisation and careful management of funds, but it really does mean that you are your own boss. Which come with many benefits!
Being in charge of your own contracting company means that you can pivot your business and embrace the kind of work that you really want to be doing without having your working life dictated by an external force. It also means that you’re responsible for upscaling your skills and managing your career development – want to take three months to really drill down into a new skill? If you’re a contractor, you can afford the luxury of bespoke personal development in a way that is not usually possible for an employed worker.
You can also dictate your working hours and use your professional experience to evaluate when a job requires additional help from a subcontractor – operating on a business-to-business level can open up a world of flexibility and even innovation.
What are some of the pitfalls of contracting?
Employees do have some advantages over contractors. One of the main joys of working the same job for the same employer is that you don’t have to navigate the minefield that is staying outside IR35 legislation. Even contractors that work stringently to avoid being pulled up by HMRC sometimes fall foul of their investigations. When you’re an employee, it’s simple: your taxes and NI are taken away from your gross income before it hits your bank account and you needn’t worry any further. Contractors with limited companies have to work diligently to make sure that their client base does not see or treat them as de facto employees, which can involve some in-depth contract negotiations and considerable personal expense.
How do contractors differentiate themselves from employees?
If you are investigated by HMRC, having insurance (particularly indemnity insurance) bolsters your case when proving that you are working outside IR35. Insurance policies that cover health and/or income protection are entirely optional expenditures when you work for yourself, but it’s worth bearing in mind that employers take out this type of cover as a matter of course. As far as their clients are concerned, contractor rights are extremely limited so it’s important that you protect yourself.
What’s all this about expenses?
There is one additional area where contractors are significantly better off than their permanently employed colleagues – when you run your own limited company there is much more leeway when it comes to claiming expenses. This won’t apply to you if you work under an umbrella company as you’re classed as an employee, but if you are the director of your own company then your independent contractor status means that you can pay for things like your working lunch with your pre-tax expense allowance. Employees are not afforded this kind of freedom.
If you’re a limited company contractor, you can also register for VAT, which means that you can charge clients 20% on top of the total fee, which goes directly to HMRC. Then you can claim VAT back on any legitimate business expense, which, if you spend a considerable amount on your business’s resources, can add up to a significant saving.
Our Money Saving Super Heroes need to know your phone number to contact you and give you the best deals for you.
Kindly enter your correct telephone number.
Our Money Saving Super Heroes need to know your daily rate to calculate accurate results and compare the best deals for you.
Kindly enter your correct daily rate.