Contracting in the UK – Working as a Contractor
Over the last 20 years, the number of professionals choosing to contract has rapidly increased in popularity in the UK as being a very viable way to earn a good income compared to traditional employment. Aside from the earning potential, there are other benefits of becoming a contractor in the UK that you might not know about.
It can be more difficult to secure a full time permanent position on one of the more popular fixed term visa’s (ie. The Tier 5 visa is only for two years), and if you are looking to work in the UK on one of these work visas, travelling around Europe is probably high on your list of things to do while you’re here. Yet working in a permanent position at a company will only offer limited leave time. The increased freedom and flexibility offered by contract work is therefore one of its biggest attractions for Australian and New Zealand professionals today. The popularity of contract work continues to rise year after year – and not only in the UK. Independent workers make up 19.1% of Australia’s workforce, which translates to one in three in the private sector, and a total 2.1 million self-employed across the country.
There are differences, however, between contracting in the UK and contracting in Australia or New Zealand, largely to do with various taxation and employment-related laws, as well as the contracting sector being significantly more mature in the UK. It is certainly something to consider if you’re looking to work in the UK because you might find yourself with a much better deal as a contractor, if you know the ins and outs before you get here.
WHAT IS CONTRACTING?
Traditionally contracting referred to self-employed workers, usually called independent contractors who, as the name suggests, work independently of a set employer for themselves. Known in some sectors as ‘freelancers’, contractors sell their services into a company via a contract. Instead of receiving an automatic pay cheque at the end of the month, a contractor invoices the company for services performed and receives payment under mutually agreeable terms.
By the 1980’s contractors played a significant role in the rise of IT in the business world. The sharp growth in this sector required more skilled labour in the job market than was readily available locally, inspiring businesses to source skilled labour from workers in other countries.
These international flexi-workers would redefine what it meant to be a contractor, and in the UK this is largely what is meant by the term today.
Thanks to high training standards available in Australia and New Zealand, as well as the shared common language and work ethic, contractors from these countries are welcomed if not sought after in the UK.
Umbrella companies, or the ability to have your own limited company, are helping more contract workers make a smooth transition through relocation assistance, while the best of these companies also offer accountancy services to help new contractors ensure they are not paying any more tax than they should.
BENEFITS OF CONTRACTING IN THE UK
It’s very common for your remuneration to be higher than that of a regular employee, primarily when working through an umbrella company or through your own limited company.
Working through these entities provides a great safety net, as these intermediaries often facilitate the set-up of formal written contracts between employers and contractors. These contracts clearly state what work will be done, the period of employment, and the agreed-upon payment/rate.
If you’re a skilled worker from outside the UK, you could earn well and live a comfortable lifestyle as a contractor, provided you have the right to work and live in the UK, of course. Here’s a list of some of the benefits of contract working in the UK.
1. Very High Earning Potential
As mentioned above, contractors can earn more than an equivalent employee, as well as the benefit of having a tax status enabling you to take home more net pay. If you promote your specialist skills, your earning potential can be even higher. Many employers are able to pay contractors more as they don’t bring the fixed costs of a full time employee, so that savings can be used to find the best contractor resource. Great news for you.
2. Freedom of Choice
Contractors enjoy being able to choose their assignments and clients, meaning you can only work on projects that you’re interested in. Equally, unlike most employees, you can be happy to take something that’s not ideal in the short term, knowing it gives you the ability to find a better contract as you want to.
Regular employees are limited to working traditional “nine to five’s” with limited time off. As a contractor, you are effectively your own boss. Depending on your specialism, this can allow you more freedom to control or negotiate your working hours and also where you work.
Without the constraints of salary conditions and holiday times, you are free to choose how much time you take between contracts. Because your daily rate will often be higher than that of a salaried employee, you can afford to take longer to travel between jobs.
5. CV enhancement
Contract work in a different country offers professionals the opportunity to gain work experience of other cultures and working styles internationally. In this very competitive global economy, gaining international experience on varied projects can not only be very personally rewarding, it can also look fantastic on your CV and can showcase you as ambitious and able to adapt to change and a variety of different working environments.
Your skills development is in your hands. Greater working flexibility allows you the opportunity to take courses or explore other areas of interest. Such investment in yourself means you’re constantly increasing your value as a professional. Equally, as you become more valued in the organisation, many employers will pay for your training and development despite the fact that you’re on a contract.
7. No office politics
Working independently reduces the need to become completely involved in much of what goes on in a company. Whether it’s simply work do’s that no one wants to go to, or bigger issues in the company that can cause lots of friction and affect morale, as a contractor you can ‘stand back’ and do what’s right for you.
8. Improved work/life balance
As your own boss, contractors are much freer to create a work/life balance that suits them. It’s too easy for employees to feel the need to prove themselves by staying late at the office. Contractors aren’t vying with anyone else for promotion. It’s also in the company’s interest to keep contractors’ working hours to the agreed amount, because any overtime will be added to the monthly invoice.
CHALLENGES ASSOCIATED WITH CONTRACTING IN THE UK
While contracting carries many benefits, as with anything, it’s not right for everyone.
Before diving into the world of contracting with your head filled with ideas of long holidays and not much else, it’s important to understand the cons that inevitably balance out the pros.
1. Skills and development
Since you’re free to upskill as and when you’d like, the onus is on you to perform. No manager or HR is spurring you on to get your training done, and while this might be liberating, the responsibility for keeping any relevant certifications up to date is yours alone..
2. Downtime between contracts
Depending on many factors such as changing demand for your skills or market conditions, you may face downtime between contracts, or even between payment times. The silver-lining here is that this time can be used to upskill, creating more demand for your experience and minimising future issues with gaps between contracts.
For contractors there’s no such thing as a paid holiday. Simply put, if you’re not working, you’re not earning. Your higher day rate should however make it easier for you to budget for any time off.
4. You may need an accountant if you have your own limited company
UK tax can be a complicated business if you don’t know what you’re doing. As a contractor you need an accountant working for you. Potential downfalls of working alone can range from paying too much tax and therefore not reaping the financial benefits of contracting that you should, to not paying enough and incurring fines.
WHAT IS THE IR35 TAX RULE – HOW DOES IT APPLY TO CONTRACTING?
The IR35, or “intermediaries’ legislation”, is a set of tax rules that apply when you work in the UK through a limited company, or “personal service company”. Working through an intermediary like an agency means that as a contractor, you are subject to IR35.
Freelancers or consultants who are in business on their own accounts don’t need to pay additional tax in the form of IR35, provided they can prove their employment status, fully understand how the legislation works and have a defence prepared if investigated by HMRC.
The introduction of IR35 has prompted the rise of more umbrella companies in and around the UK that act as employers to contractors. These companies mitigate IR35 tax issues by providing comprehensive contracts stipulating remuneration via a combination of salary, bonuses and tax-free expenses.
Umbrella agencies have become the most efficient means of overcoming the IR35 legislation and ensures that you secure the most earning potential from contract work while also removing the headaches of dealing with administration, insurance costs and accounting fees.