Many people question whether they should remain in permanent employment, or take the leap into the world of contracting. Some pro's and con's to consider.

So you can see that the initially perceived earnings can rapidly fall. And that's before we start thinking about Corporation tax on profits and dividend tax etc...

Tax advantages

The above notwithstanding, there are undoubtedly advantages from a tax liability perspective of working through a limited company. That is of course you are not deemed inside IR35 - more later on that!

Essentially you can choose how much you pay yourself PAYE, you can take additional earnings as dividends, and you can run certain costs and expenses through the business. And a number of other benefits as well which can be realised. But that is a conversation to have with a qualified accountant!

Flexibility of time off.

When you are employed, we have in the UK a minimum of 20 days paid annual leave, with an additional 8 statutory days holiday (9 next year due to the additional one on Friday 3rd June for the Queen's Platinum Jubilee). This is, of course, the minimum and many employers offer more than this. Whilst some employers will offer additional unpaid leave or extended unpaid leave on a sabbatical, it is often not quite that simple to actually get.

As a contractor, however, cash-flow permitting, you can give yourself as much time off as you like. Want to take 3 months off to do a home project then fine. Want to take a month out each year to unwind in a tropical island paradise, then you are free to do so (you know who you are!). If you want to take time off between each project to visit a different country, feel free!

Uncertainty and work insecurity

Notwithstanding the benefits mentioned around flexibility, this is only a plus where it is of your choosing.

There may be times in a contractor's career when for one reason or another, suitable work just does not present itself. There could be a lack of available opportunities at a time when you are 'between jobs'. Alternatively, the available work at any given time could be in unsuitable locations, which can be a problem because as a subcontractor you often will not get your travel time or costs paid. You may even find yourself out of work unexpectedly when there is a quieter spell at the company you are working at (or because of a global pandemic!!!!) and of course, priority will be given to the employed staff for continued work. They will be found work to do, to keep them busy, but you will not.

This means that you will therefore potentially have time out of work. This will, of course, have an impact on your cash flow, and net cash reserves and in reality mean that your average earnings over a year from the 'lucrative' day rates you are chasing are diluted. You need to be sure the other benefits outweigh the financial risk.

Difficulty accessing training and development

This is actually quite a big one. The level of training and development offered by employers can vary widely (also widely varying is the level of T&D people actually receive in comparison to that offered and sold to them at the interview stage, but that is one for another blog!).

The key factor here, as it relates to the decision to be made around contracting is that as an employee, you will often be offered paid training at absolutely no cost to you, for either your time which is still paid through your salary, or the costs of the course itself. Additionally, you will even have access to training that you simply would not even be able to access without that employer.

This is something that you should consider. If you are still learning your trade and still need to go through extensive training and development, the potential short-term benefits could well be outweighed by the impact to your long-term prospects. Even where you are a fully-fledged independent worker, you need to make sure that you are still making the personal commitment in time (unpaid) and money (for the courses and qualifications themselves) to keep yourself current and indeed move forward.

Freedom of choice
Contracting does offer you the freedom to choose your work. If the work is in an inconvenient location or not technically stimulating enough for you, then simply, you wouldn't take the contract on offer. Not a luxury that you would have in an employed position where you would simply be deployed where needed - though most sensible employers would at least try to make it workable for everyone.

Liability and Risk

When you work as an employee, all of the risk and liability are carried by an employer. Working as a contractor, the risk is very heavily in your direction. How much varies on how you are set up. Sole traders carry the full risk of loss personally. Personal risk if operating through your own ltd company is reduced as your personal liability is limited, hence the name, but nonetheless, a heavy claim could fold your company. Insurance is therefore a necessary cost and requisite to providing your services and many companies will not engage your services without suitable cover in place for public liability and professional indemnity amongst other requirements.

Financial affairs

As an employee, it is fairly straightforward. Bar the at-source PAYE deductions, what you are paid is obvious and clearly yours.  As a contractor, unless you work PAYE through the agency or an umbrella company, whether you operate CIS, sole-trader or Ltd (other routes are available too) Complex financial affairs with Taxation and VAT, personal expenses, Corporation Tax, different ways to pay yourself can be complex.

You are also at risk from unfavourable legislative changes - IR35 being a prime example in the last year with many companies putting in place blanket bans on PSC workers, or finding people 'Inside' which essentially means they are deemed as employees and all pay treated as PAYE (without even consider many of the expenses listed in the table earlier in the article which now come out as costs still but after tax - effectively costing up to twice as much) which can have a massive impact on earning potential, and also have wider and continuing implications on your earning in other 'outside' roles.

Financial Risk

As an employee, it is relatively simple and risk-free. Turn up, do your job, and get paid regularly. It is not quite so simple when self-employed.

As a contractor you may face challenges with companies setting you up as an independent supplier - you may face some onerous processes or terms from companies. I have for example oftentimes been asked by a client to payroll someone as they just couldn't get them set up with their supply chain team either in a timely fashion or, at all.

Long payment terms can also be a yoke around your neck. As a staff member, you get paid every month like clockwork, and your personal cash flow is relatively reliable. As a contractor however you could be faced with varying terms from 7 days (brilliant!), 30 days end of the month (i.e. up to 2 months), 60 days, 60 days end of the month (up to 3 months) or even longer. Where you are working with a lot of different clients with lots of different payment terms you could find yourself with a very unsteady cash flow.

You could also find yourself in pay disputes where there are challenges on your invoices, or, in absolute disaster scenarios, you could also find yourself not getting paid at all.

ALWAYS make sure you have a cash reserve to see you through.

Of course, much of this can be mitigated if you work via Crucial People who can keep your cash flow regular and your pay protected.

You need to really consider if contracting is for you.

So, all things on balance, is it right for you?

If you would like to explore this further then get in touch with me kayhan@crucial-people.com or 0203 154 9422 for a confidential conversation.