For tech professionals with niche skills, IT contracting was previously a desirable proposition vs permanent employment. However, in April 2021, changes to IR35, the rule governing how contractors are taxed, made it more difficult to exist as an IT contractor. Surprisingly, in September 2022, the new UK government announced that those changes would be repealed, taking effect in April 2023. So is IT contracting becoming more attractive again?
Well, contracting may have become more attractive again in 2023 had the UK government continued with its plans to repeal the off-payroll rules. Sadly, only weeks after making the announcement, Jeremy Hunt scrapped the plans made by the previous chancellor of the exchequer.
The below article outlines how those changes would have benefited UK contractors had those changes come to fruition.
5 Main Benefits of IT Contracting VS Permanent Employment
Retain More of Their Earnings
It is not unusual for highly skilled IT professionals working in permanent employment to receive salaries of £70,000 per year. On top of this, they might receive company benefits, including paid holidays, a company pension, gym membership and life insurance. In a nutshell, that sounds like a pretty good deal for someone whose skills are in demand.
If the same individual worked as an IT contractor, they would be financially better off. Instead of earning a high salary, they are usually directors of their own limited companies. Being a director means they can pay themselves a low salary, just under the National Insurance threshold, then take the rest as dividends. So, as there is no NI payable on dividends, the contractor winds up being £470 better off per month.
Able to Claim Expenses
As an employee of a business, your employer won’t pay you to travel to work or eat lunch. However, as a contractor is their own boss, they can claim those expenses back from their income before tax.
Enjoy More Variety in Their Work
It’s not just the financial benefits a contractor stands to gain. An employee in a permanent role benefits from the security of knowing they have full-time work on a long-term basis. Whereas IT contractors tend to change jobs more frequently.
The average employee remains in employment with a company for, on average, about four years. Changing jobs more often than this, as a permanent employee, can cause employers to view you as a job hopper.
However, it is the norm for IT contractors to accept contracts of fixed lengths of anything between a couple of weeks to two years. Companies often hire IT contractors to complete a specific project or to work on an ongoing project for a short period. This keeps a contractor’s working life varied and exciting.
Choose Their Working Hours
An employee’s contract usually states that they must work specific hours per week on a schedule their employer chooses. On the other hand, contractors charge for their time daily, so they can choose how many days they work.
A typical IT employee will work 232 days per year and get a standard 28 days of annual leave. Whereas the average tech contractor works between 220 to 230 days per year, or whatever suits their work-life balance.
Command Higher Rates of Pay
Contractors don’t get any benefits that permanent employees receive from their employers. Therefore, they can charge more for their services than an employee doing the same job might earn.
Freedom to Work on Multiple Jobs
Employees of a business often have it written into their contracts that they must not do any paid work for any business other than their employer. Contractors, however, are free to work for as many companies as they like.
How Contracting Changed in 2021
As you can see from the points above, it might be easy for contractors to fiddle their books to avoid paying certain taxes and national insurance.
While there are benefits to being a contractor, there are also benefits for employers hiring contractors. For example, let’s say a small tech start-up takes on several permanent employees, but then the work dries up. At this point, the employer must decide whether to keep them working in different roles or make them redundant. But if the business hired those individuals as contractors, the company could terminate their contracts.
The above point means the system is easy for employers to abuse, who might hire people as contractors when they should take them on as employees.
The previous government made changes to the IR35 law to protect employees, and so that HMRC could recoup lost taxes. The onus was placed upon employers to decide whether employees were performing their job inside or outside IR35 rules.
- Contractors working legitimately and paid by a limited company do so outside IR35 rules.
- Anyone working inside IR35 rules is deemed an employee of a business and is therefore liable for NI and PAYE.
The penalties for employing contractors inside IR35 are
- 30% of unpaid tax is payable if they were careless about the employment status but did not know they were in the wrong.
- 70% of unpaid tax is payable if they knew they were within IR35 and chose to keep quiet.
- 100% of the tax they owe to HMRC becomes payable if contractors actively try to conceal their IR35 status.
There is such a grey area as to what could be inside or outside IR35. Many contractors risk incurring fines and must take out costly insurance to cover themselves. The alternative is to employ the financial services of an umbrella company, to avoid being held personally liable.
Both options incur extra costs, affecting how much tech contractors may earn. Not only that, but there are also hefty penalties for the employer. Rather than risk a fine, employers simply stopped hiring contractors and instead took people on as permanent employees. This meant that there were fewer available contracts for tech professionals to work on.
So Might IT Contracting Become More Attractive Once More?
To some, IT contracting will never be an attractive proposition. If you’re the kind of person who finds comfort in being paid a regular salary, you may prefer being an employee. Likewise, while IT contractors earn more than permanent employees, some people could live without all the paperwork that comes with running a limited company.
The change of rules in 2021 certainly made contracting less attractive from an employer’s perspective. It has been worth taking the risk for contractors commanding high fees, but with insurance. Although employer reluctance has meant fewer available contracts to work on.
With the repeal of the 2021 IR35 rules, we expect to see more available contract jobs appearing on the job boards again. Furthermore, as many economic experts predict, if the UK goes into recession, we expect to see many more employers hiring contractors until the situation improves.
If you’re an IT professional debating whether to go contract or permanent, our team of IT recruitment consultants would be happy to help you work through your options. Why not give them a call?