Do Contractors Earn More Than Permanent Employees?

How much does a contractor earn?

Over the last two decades, the number of people migrating away from full-time employment to the freedom and flexibility of self-employed contracting has skyrocketed. From just 3.3 million people in 2001, there are now almost 5 million contractors working in the UK today, comprising over 15% of the British workforce.

The benefits of such a switch are self-evident. Not only can contractors dispense with their responsibilities to a boss and seek out only clients whom they wish to work with, the potential for independent organisation of their work-life equilibrium is unparalleled. But are there financial benefits to transitioning to self-employment as well? Although complicated and dependent upon a large number of variables, the answer in most cases is a resounding yes.

How much does a contractor earn?

There are three principal ways in which contractor earnings differ from that of an employee and which make the former a more attractive role than the latter from a financial perspective. Let’s take a look at those three factors in isolation:

  • Wage

For starters, contractors generally earn a higher wage per day than their employed counterparts, since companies will often pay an inflated fee to gain sporadic access to specialised skills.

At the same time, contractor earnings are not supplemented by additional statutory rights such as holiday allowance, sick pay and maternity or paternity leave as an employee’s wages are, along with a whole shedload of other perks and benefits depending upon the job in question. Therefore, it makes perfect sense that a contractor would charge more for their time, since they must cover the risks that self-employment brings.

  • Tax efficiency

Secondly, if managed correctly, contractors can manipulate their tax arrangements to pay less to HMRC than an employed individual. Traditionally, this would involve setting up a limited company and paying yourself a modest wage up to the personal allowance (£12,500 for the tax year 2019/20), thus incurring no income tax whatsoever on those earnings. The remaining profits of the company would then be subject to the corporation tax rate of 19% and could either be taken as dividends (typically taxed at 7.5%) or invested back into the company.

There’s even the option to defer those profits until a later tax year to avoid paying the full amount of taxable contributions this time around. Having said all that, the introduction of IR35 legislation has made tax efficiency a more complicated matter for self-employed people – more on that later.

  • Expenses

Thirdly, contractors are also capable of claiming expenses on their daily outgoings, whereas employed people are generally not able to do so. This particularly aspect of self-employment must be managed carefully, since HMRC are both vague and strict about what they deem as claimable expenses.

Food, for example, can be claimed – but only if it is eaten on a day which falls outside of the normal working routine of the individual (daily lunches are unlikely to be allowed). Nevertheless, claiming all overheads (such as office space, insurance and equipment) can save significant sums, making contracting even more attractive from a fiscal perspective.

The IR35 question

The tax benefits mentioned above had previously made setting up a limited company so beneficial to self-employed people that HMRC began to suspect many workers who were employed in all but name were abusing the system to pay a lower rate of tax, while the companies who contracted them also avoided paying employer’s national insurance contributions (NICs). As a result, IR35 was introduced in 1997 to clamp down on this kind of chicanery.

However, the legislation was amended in 2017 to stipulate that all public sector end clients would now be responsible for determining whether the contractors with whom they worked fell “within” IR35. Fearful of falling afoul of the rules and incurring hefty fines, many clients simply swept all of the contractors they worked with into the IR35 dragnet in a better-safe-than-sorry policy – but this meant that both parties were now forced to pay significantly higher rates of income tax and NICs. Contractor earnings were unsurprisingly hampered as a result.

From April 2020, that legislation is set to be expanded even further to include all private sector contracts, as well. This means that end clients (and by extension, contractors too) will have to go to great lengths to demonstrate to HMRC that IR35 is not applicable to their contracts. Even after investing all of that time and effort, there’s no guarantee that the tax office will view the situation in the same way, meaning 170,000 self-employed contractors could be liable to pay thousands of pounds more in tax and NICs from next year onwards.

Having your cake and eating it

Fortunately, there is a way to enjoy the financial advantages of a higher wage and claimable expenses that contracting brings, without any of the tax problems that IR35 can create. By entering into the payroll of an umbrella company, contractors are able to still organise their own working schedules and command higher daily fees than full-time employees, as well as claiming expenses on their overheads. However, since they will become employees in the eyes of HMRC, the need to comply with IR35 will become irrelevant.

Of course, this means that the tax efficiencies mentioned above will disappear, since they’ll be paid according to PAYE rules in the same way that any other employee is – but those benefits are already being significantly diminished by IR35 anyway. What’s more, the umbrella company will also provide all of the supplemental statutory rights that any other employer does.

When the value of those benefits is taken into account, alongside the higher daily rate that contractors can command, it becomes clear that working as a contractor – via an umbrella company – allows Britain’s self-employed community to have their cake and eat it.

Find an umbrella company

If you’re considering taking the plunge and switching to self-employment, it could be a good idea to take shelter from IR35 under an umbrella company. However, it should be remembered that not all firms offer the same services and advantages as each other, which is why doing your due diligence and vetting several options prior to signing on the dotted line is a prudent approach.

Our online comparison tool is the best way to view at a glance which services are offered by which companies and determine who is likely to be the best fit for your unique circumstances. Begin your journey to self-employed satisfaction today!

Would you like more information on Do Contractors Earn More Than Permanent Employees??

Explore More Resources

Using an Umbrella Calculator

The Pros of Using an Umbrella Calculator

There are many advantages to using an umbrella calculator for contractors.

Umbrella calculators allow you to quickly compare thousands of umbrella companies across the UK, offering a clear overview of what you will receive from the company, including everything from your take-home pay, what benefits you will receive, and what services the company will offer.

To help contractors find out more, Umbrella Supermarket outlines the main benefits to using an umbrella calculator in 2021.

umbrella vs limited

Umbrella vs Limited Company: What to know when making the move this new tax year

The 6th April 2021 marked significant changes to IR35 legislation which impacted thousands of self-employed, limited company contractors operating within the private sector.

In light of the changes that have now rolled out, many limited company contractors are understandably considering their options and thinking about making the move to umbrella this new tax year.

To help make the decision that little bit easier, in this guide Umbrella Supermarket outline what contractors need to know about making the move from limited company to umbrella in 2021, to help you get on the right track.

 

umbrella company vs paye

Umbrella Company vs PAYE: What should you choose?

Umbrella company vs PAYE is a question asked by thousands of contractors.

After all, it’s a big decision to make that will have a direct impact on your contracting career and day-to-day life, so it’s not one that should be taken lightly.

To help every contractor make the right decision for them, Umbrella Supermarket has put together this insightful guide outlining the key differences between umbrella and PAYE and the advantages and drawbacks of each.

avoid ir35

How can I avoid IR35?

As a contractor, you will most likely know about IR35 and upcoming reforms from April 2021.

These changes to IR35 legislation are set to badly impact many self-employed contractors in the private sector, so thousands are understandably worried. After all, getting caught out by IR35 can mean you end up paying more in tax than you need at the same level as an employee, without receiving the benefits of being employed, such as statutory rights.

umbrella company costs

Umbrella Company Fees: How Much Should You Pay?

When deciding which umbrella company to work with, the fees they charge will inevitably play an important role in the decision-making process.

Umbrella company fees are taken directly out of the contractor’s income, so it is only natural that contractors want to ensure they are getting a fair deal.

To help contractors understand umbrella company fees, from how they are charged, what they will receive in return, and how much they should be paying, Umbrella Supermarket outlines everything there is to know about umbrella fees in this handy guide.

umbrella vs limited

Pros and Cons of Limited vs. Umbrella

Big reforms to IR35 legislation are set to come into motion from 6th April 2021 which will impact the thousands of self-employed, private-sector contractors out there.

For this reason, many of the contractors that currently operate through a limited company will be considering the umbrella company route as an alternative.

If this is true for you, it’s important to do your research to find out whether limited company vs umbrella is the best option for you in 2021.

To help make the decision that little bit easier, in this guide Umbrella Supermarket outline the key differences between limited vs umbrella, so you can get on the right track.

2021 budget

What Does the 2021 Budget Mean for Contractors?

On 3rd March 2021 Chancellor Rishi Sunak unveiled his Budget in the House of Commons, outlining the government’s tax and spending plans for the year ahead.

Sunak announced a variety of measures he will put into place to help businesses and jobs that have suffered through the pandemic, as well as outlining a plan for the long-term recovery of the economy.

However, the question many contractors will be asking is how the Budget will impact the

umbrella company

5 Benefits to Working with an Umbrella Company

Contracting through an umbrella company has become an increasingly popular option for contractors across the UK in recent years. After all, it is a route that offers contractors a range of benefits over other paths such as working through PAYE or being self-employed.

 

 

ir35 reforms

Contractor’s Guide to IR35 in 2021

From April 6th 2021, reforms to IR35 legislation will come into force, impacting the lives of thousands of self-employed contractors.

Inevitably, contractors across the UK are concerned about upcoming reforms and how these will affect them. To help, in this guide, Umbrella Supermarket look at what these changes to IR35 entail and how they might impact you as a contractor in 2021.

 

compare umbrella company fees

How to Compare Umbrella Company Fees

If you are considering joining an umbrella company in 2021, or have been contracting through one for a while and want to ensure you are getting a good deal, it is important that you know how to compare umbrella company fees.

What you pay in income tax and National Insurance will be the same regardless of which umbrella company you choose, however the fees the umbrella company charges can make a big difference to your take home pay.

At Umbrella Supermarket, we know that every contractor wants to get a fair deal. To help, we explain how umbrella company fees work and how you can compare them to find the best deal.

job retention scheme

Job Retention Scheme for Contractors in 2021

The COVID-19 pandemic has impacted workers across the UK and contractors have been no exception.

Many of the 1.77 million independent contractors have either lost work altogether or have had contracts put temporarily on hold leaving them in a tricky position.

Fortunately, many of these contractors are eligible for the government’s Job Retention Scheme otherwise known as furlough, introduced to offer financial support for businesses and workers. This has been an essential source of income for many who have lost contract work as a result of the pandemic.

As we experience a third national lockdown, the furlough scheme has now been extended until the 30th April. So, if you find yourself out of contract work or have projects on hold, Umbrella Supermarket are here to explain what the Job Retention Scheme is, how it works and what this means for contractors.