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:

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Advantages of Contracting

A few downsides of Contracting

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

Disadvantages


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 £125 + 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.

SJD Accountancy offers an all-inclusive fixed-fee accountancy package, for just £120 + VAT per month. There is no minimum length of time you need to appoint us and there are no entry or exit fees. 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

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.

Contact SJD Accountancy

To appoint SJD Accountancy as your accountant, the quickest and easiest way to do so is by speaking to our Contractor Advice Team. Appoint us.

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How can SJD Accountancy help?


Appointing an accountant can save you time and stress when starting up on your own. If you would like to speak to someone about any of the above information or any other queries you may have, arrange a callback and a member of the team will be in touch.

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