Contractor or Permanent Employee?

Uncertain if making the move into contracting is for you?

For many people, the idea of working as a permanent employee as opposed to a contractor, would mean a lot more security by knowing that a set wage is coming in every month.  However, the times are changing, particularly with the growing economic uncertainty, so is there really such a thing as a secure permanent position anymore?

Contacting is being used less as an avenue for those people forced into redundancy and is now becoming the chosen working style for many. SJD’s 2012 Contractor Attitude Survey was completed by over 1,000 Limited company contractor clients. Of these 1,000+ responses, just 12% stated redundancy, headhunting or retirement as the reason they made the move into contracting with 74% consciously choosing to join the contracting, world.

With regards to whether you can be a successful contractor in the current climate, the Contractor Attitude Survey results 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 are a list of the advantages and downsides that come when making the move into contracting:

Advantages

  • 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 working conditions and negotiating payment terms.
  • Taking 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 skill set, CV and allow you to establish an extensive list of references.

A few downsides

  • 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 SJD’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.

How to contract?

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, this will typically see you take home around 75%-80% of your contract value, compared to around just 60%-65% of your contract when working through and umbrella company.

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 trading through 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 – simply submit spreadsheets to your accountant.

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 to 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 time-sheet 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 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

Appoint SJD Accountancy and never worry about your tax or accountancy affairs again!

If you have any questions about contracting or would like any further advice please call our new client services helpdesk on Freephone 0500 152500 / 01442 275789 or email: nikki.hanlon@sjdaccountancy.com.

SJD Accountancy

SJD Accountancy are the UK's largest specialist provider of fixed fee, Limited company accountancy services to contractors; we've been acting for contractors across the UK since 1992 and have more than 15,000 clients.

We are the only national specialist firm of contractor accountants with offices nationwide. SJD Accountancy has more qualified staff than any other firm in our market with qualifications from the following major tax and accountancy bodies - ATT, AAT, CTA, ACCA, CA, ACA and FCCA.

  • Unlimited face to face meetings. This is a unique service only SJD Accountancy offers - unlimited face to face meetings across the UK - tax is complicated and sometimes only a meeting will do.
  • UK's Largest contractor accountants with more qualified staff. No call centres, no outsourcing, no automated call handling. Simply telephone, email or meet your own dedicated accountant face to face.
  • Money back service guarantee. All your telephone calls and emails will be answered the same day or we will make a full refund of that months fee.
  • Outstanding reputation. We have won more awards for customer service and accountancy excellence than any other firm in our market, including: Best Accountant for Contractors, Accountant of the Year and Best Professional Service Team to name just a few.
  • All inclusive low cost fixed fee accountancy package which includes completion of accounts*, payroll bureau, dividends and corporation tax computations, personal taxation, free bookkeeping software, your own dedicated accountant* and all company returns for a fixed fee starting from £120 plus VAT per month. Check our packages for more detail.

If you have any questions about contracting or would like any further advice please call our new client services helpdesk on 01442 275789 or email: janice@sjdaccountancy.com. Our new client services helpdesk is open Monday to Friday (8am to 6pm).

Appoint SJD Accountancy and never worry about your tax or accountancy affairs again.

Form your own Limited company with SJD - our same day online company formation service includes company bank account set up, VAT/PAYE registration and advice on optimum share structure. 

You may also find the following pages, guides and case studies useful:

*If you would like us to complete your company year end accounts we simply ask that you have been a client of SJD for one year or have made 12 monthly payments. All accountants are part or fully qualified.