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The Perks of Being a Contractor

Contracting or freelancing seems to be gaining popularity rapidly and, although once a little known method of working, is fast becoming a way out of the daily grind for many.

A key reason for this is simple; contractors make more money than employees. The reason for that, however, is not so simple and because of this we have spoken to some of the industry’s leading experts, and have gathered our top 3 ‘perks’ of contracting.

Boba FettBelow are the top 3 reasons why employees are so envious of limited company contractors.

1. TAXES

What contracting is known for throughout the professional sector is that contractors can end up with more ‘take home pay’ than their employed counterparts.

One reason for this miraculous ability is a result of limited company contractors not having to pay as much tax as the average employee, and for many it is this factor that is arguably the most prolific when deciding to take the leap over to limited company trading.

Every rose unfortunately has its thorn, however, and when it comes to contracting, the rose that is ‘paying less tax’ comes with a very aggravating thorn indeed. IR35 is a term relatively unknown outside of the contracting profession, but anyone who is aware of the Revenue’s secret weapon will undoubtedly tremble with fear.

For an expert’s opinion, we have spoken to Qdos Contractor’s Seb Maley, IR35 expert and long-time tax specialist, to comment on the perks of lower tax verses the threat of IR35.

“Operating through a limited company as opposed to an employee brings significant financial benefits. By taking a small salary and high dividends you pay far less National Insurance, saving around 26%. There are obviously associated costs involved in running your own company, such as accountancy fees and insurance, but the overall ‘take home’ pay will still almost certainly exceed that of an employee.

But with the benefits there also comes risks. The IR35 legislation could affect any contractors working through limited companies and it’s vital that you take steps to ensure you are compliant. Contracting is also far less stable than permanent employment; you have been engaged as a temporary resource and your client can terminate the agreement at any stage. There is also the issue of illness; as a contractor you won’t receive any sick pay from your client, so any days not worked will hit your finances.”

Despite potential pitfalls, as limited company owners, those working as contractors benefit on a number of major levels, none more advantageous than their ability to relinquish less of their earnings to the revenue.

2. EXPENSES

Expenses are additional day to day costs that affect all of us working stiffs, regardless of our profession or industry. Whether you commute, buy lunch or even treat yourself to an extravagant cup of coffee each day, these supplementary costs are a bi-product of working a day job and for most cannot be reimbursed.

Crunch Accounting’s Jonathan Norris dishes out some good news for contractors regarding business expenses:
"Unlike full-time employees, contractors have the option to claim business expenses, which will reduce their company profits and in turn their tax liabilities. For this reason it's always good practice to claim back any and all allowable business expenses."

It’s always worth speaking to your accountant to ensure you are making the most of your ability to claim expenses through your company. Obviously any expenses must be ‘wholly, exclusively and necessarily’ incurred in the performance of your business duties.

3. LIFESTYLE

Ah the lifestyle of a contractor, the promised land where lowly employees one day wish to inhabit…

Becoming a limited company contractor brings with it many advantages that those working within employment are not entitled to. It is true that some professionals take the leap into contracting just for the lifestyle change, and when considering the perks, it is not hard to see why.

Dave Chaplin, contracting expert and CEO of ContractorCalculator expresses the benefits that contracting has on your lifestyle within his self-help guide, The Contractor’s Handbook:

“A very attractive aspect of contracting is that you basically get paid for what you do. If you’re asked to work overtime or over a week end you can, and you get paid for it.”

From professional satisfaction to longer, more lavish holidays, the apparent improvements that being a self-employed contractor has on day to day life are plenty, hence such a recent influx of people entering the profession.

“They see contracting as a way of earning more money, taking more holidays, and continuing to do what they love doing.”

Being self-employed really is the dream for a lot of professionals, and being able to ‘be your own boss’ has never been more attractive.

Contracting offers this luxury whilst still being able to do a job or carry out a service similar to that of your employed self.

Of course, the flip side is that there is far less stability in contracting; prolonged periods ‘on the bench’ can be utterly demoralising and leave you longing for the reliability of permanent employment.

To share your own experiences or part with your own contracting wisdom on this matter, please leave comments in our box provided, or feel free to discuss within our forum.

By Troy Stevens

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3 thoughts on “The Perks of Being a Contractor”

  1. Tony Cox

    I understand the National Insurance savings of small salary and large dividends but surely these saving are to some extent offset by the Limited Company having to pay Corporation Tax at about 20 -22% on its profits. So if I get dividends of £100k my company has to make profits of about £125k and pay somewhere around £22k Corporation Tax. Ovwerall a much smaller net profit than the 26% saving claimed. Or am I wrong?

  2. Troy Stevens

    As a general rule, a mixture of salary & dividends is probably the most suitable course of action when extracting profits from a company. However in making that decision an individual’s & the company’s specific circumstances must be reviewed & it is worthwhile doing the number crunching to ascertain if a tax advantage can be achieved. For help calculating dividend vs salary, follow this link: http://www.uktaxcalculators.co.uk/dividend-vs-salary.php

  3. Paul Emery

    On the kind of level of dividends that you are looking at you will be paying higher rate personal tax as well. This diminishes the benefit somewhat but you are still better off having the limited company than paying PAYE on the equivalent of £125k. The article also doesn’t make mention of the potential benefits of being on the flat rate scheme for VAT.

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