Thinking of contracting? 8 things you need to know…

 

Becoming a contractor might seem like a no-brainer. You answer to nobody, enjoy better financial rewards and work in a flexible way that’ll complement your lifestyle.

 

While there are certainly many pros to being a contractor, there are also a few downsides to consider too. So before you get too attached to the idea of cruising round in a drop top sports car on a Tuesday while everyone else is stuck at a desk, here are some facts you need to know…

 

 

Contractors earn more than employees. The reasons for this are threefold: they can charge more, pay less in taxes and deduct business expenses from their earnings.

 

The big skills shortage in IT and cyber security has led to many professionals commanding day rates well above £1,000. While employees in this sector are also benefiting from the disparity between supply and demand, contractors benefit the most.

 

Companies seeking skilled professionals for specific projects are usually willing to pay a premium for those hard-to-find skills. Of course sometimes contractors are recruited to fulfil the same role as an employee. However, due to the shortage of skills and the ad-hoc nature of contractual work, they often secure a higher rate of pay as a further incentive to complete the contract.

 

Businesses can afford to pay contractors more than employees because the cost is tax-deductible for the company; it can be processed as a project cost rather than employee payroll. The payment from company to contractor is therefore more like a business to business transaction rather than the traditional employer-employee relationship.

 

 

One of the biggest advantages of being a contractor is that you get to call the shots. You decide who you work with – and if you don’t like a company or its culture, you know the length of time you’ll be there is finite.

 

Most importantly, you become the maker of your own destiny. You’re free to choose your own projects so you can find the perfect fit for your skillset. As an employee, you may find yourself being asked to complete tasks way out of your skills zone or be expected to do additional work outside of your role. Contractors are employed for a specific job, so if you’re asked to do more, you’re entitled to challenge it or request additional payment.

 

As your own boss, you can wave goodbye to stifling corporate bureaucracy, toxic work environments and arbitrary rules – all of which have the potential to make you feel unhappy.

 

When you work as a contractor, every success is personal. In other words: you have total control over your own career progression and financial success. This autonomy is likely to bring with it a greater sense of achievement and career satisfaction. According to a 2016 report by McKinsey Global Institute, 97% of contractors are much happier and more satisfied than their employee counterparts.

 

On the flipside is a nomadic employment lifestyle. Your contracts could be a few months or a few years. You have to find a business with the right cultural fit, of course. But the transient nature of contracting means you won’t necessarily be a part of a team in quite the same way. Of course, an employer who loves your work may be inclined to get you on board full time or on a retainer, so you might be given that option anyway.

 

 

While employees have a written contract of employment, as a contractor, you have a contract for services. A written contract acts as a legal safety net for both parties by setting out clear terms and expectations – and for employees and contractors, these contracts are governed by law in very different ways..

 

If you do not fulfil the terms of your contract or make a costly or damaging error, a company can terminate your contract and you may be held liable. Equally, if the company you’re working for contravene your terms and conditions, the same rules apply.

 

On the whole, employees are not protected by contractual agreements for the first two years of employment. This means that an employer can dismiss them and (with the exception of unfair dismissal), the employee has no path for recourse.

 

As a contractor, if there are any disputes (regarding things like payment, timeframes, sudden termination of work or IP), having a contract will help to resolve them. The legally binding nature of a written contract also means issues can be settled in court, if necessary.

 

 

If you get sick as an employee, life goes on. Companies have infrastructures which mean absence can be dealt with and work is covered. Crucially, you still get paid.

 

If you’re off work for more than four days, you are eligible for SSP (Statutory Sick Pay) and you cannot receive less than this amount (£92.05 a week). However, many companies have a sick pay scheme which means employees are entitled to significantly more than this amount.

 

 

As a contractor, you are the sole worker so there is no one to pick up the slack. And, unlike employment, if the work isn’t done, you don’t get paid. This not only impacts your income but could also jeopardise relationships with the companies you work with. If they have deadlines and are relying on you, your inability to work could end up costing them time and money.

 

Holidays are another factor to consider. As an employee you are entitled to a number of days of paid annual leave. You can go on holiday knowing you’ll still get paid the same amount at the end of the month. As a contractor, you can take as many days off as you want – but you won’t be paid for them.

 

You may currently have a work pension scheme, but you won’t have one as a contractor. Of course, you can still pay into a pension but you’ll have to find a private one and take care of all the admin yourself.

 

 

Eleanor Roosevelt once said, ‘with great freedom comes great responsibility’, but what if that responsibility keeps you up at night? All the benefits of being a contractor only matter if you’re making money. Without regular contracts in place, you may have more free time on your hands than you want.

 

You might have one or more clients that work with you regularly, but the nature of contracted work is that it can stop at any time. Nobody owes you another contract so you don’t have any guarantee of income. This potential variation in income could make it difficult for you to plan ahead or make big purchases.

 

When it comes to mortgages, the rise in people working independently means more lenders are willing to lend to contractors. However, you’re more likely to encounter difficulty and you may need a larger deposit than your employee counterparts.

 

 

When you’re an employee, you can take time to look at your career as a whole. Where do you see yourself in five years’ time? Which skills do you need to develop? How can your employer help your career progression?

 

As a contractor, you’re often so busy doing the job and finding new work that the personal development side of things is likely to be the last thing on your mind. If there are new skills you’d like to learn or additional qualifications you want to get, chances are you simply won’t have the time.

 

Many companies these days help employees devise a career progression plan with clear goals, targets and methods of getting to where they want to go. But as a contractor, there is no plan unless you come up with it yourself – and stick to it.

 

 

The question of certification is one which should be considered if you’re thinking about contracting. Will there still be demand for your skills set in 5 or 10 years’ time? Or will you need to acquire new certifications?

 

As an employee, your employer is likely to foot the bill for any necessary certifications but as a contractor, it’s up to you to find the time and money to keep your skills up to date. It’s important to note that this is a cost which can run into the thousands.

 

 

In place since 1999, IR35 is tax legislation which aims to combat what HMRC deems to be tax avoidance or ‘disguised employment’. If contractors are caught out by IR35, their earnings will be subject to normal employee NI and PAYE. The financial cost of this is potentially huge and can negatively impact earnings by up to 25%.

 

While until now most legitimate contractors have had nothing to fear, the current review of IR35 in the public and private sectors could see many forced onto payrolls.

 

One way in which contractors can clarify their legitimacy is through their written contracts with the businesses they work with. Ensuring your contract clearly stipulates that the relationship is business to business rather than employer-employee will help you prove your contractor status.

 

 

 

How you decide to earn your money is a personal choice. There’s no better or worse way – simply advantages and disadvantages to both. If you’re the kind of person who needs security and predictability, then contracting probably isn’t the best option. Likewise, if you’re desperate to call the shots and want more flexible work, employment is unlikely to make you happy. What’s important is to consider all the pros and cons and decide what works for you.