IR35: Current market and Contracting vs Permanent employment

This is a new IR35 post series on Contracting and Permanent employment. I will talk about the current state of the market, the future of contracting both inside and outside IR35. I have plenty of data to talk about money and the impact of the April 2020 tax changes, whether you should go Perm or Umbrella, why perms should consider contracting and more.

Contracting from April 2020 and beyond

You don’t have to be a contractor to realise the mess IR35 has recently caused to companies and people. The number of emails asking me what my plans are for 2020 confirms that. The government last year announced that in April 2020 the IR35 legislation will come into effect in the private sector.

What this means is that people who work through their limited companies will now pay higher taxes, as if their temporary employment is not really temporary (but PAYE). HMRC wants contractors (often called Personal Services Companies – PSC) to pay income tax, in fact, more tax than a permanent member of staff. (I promise the acronyms stop here 🙂 ).

The tricky bit is that there are no clear guidelines as to what is a legitimate company or not. If I’m someone working 7 years in the same position in the office for a “client” you’d think I should be an employee, right? I should be in the company’s payroll.

If I’m a person who works for a week to build a logo for you from my own office am I an “employee” or not? You’d think no, right? What if I’m working in your office for 1 month on that? Now things get trickier. Things like mutuality of obligation, the substitute rule and statement of work come into play, which I will tackle another time.

The truth is, it’s not so straightforward.

IR35 light at the end of the tunnel?
Maybe there’s light?

Previously, the call on whether you fall outside or inside IR35 legislation was on you, the contractor. So everybody thought they’re a legit company. Money talks 😉 But now the check must be done by the end-client. In other words, the company to whom you provide the work.

From now on, if I’m a designer building something for Lloyds, it’s Lloyds who should determine what tax I should pay for the engagement with them.

HMRC provided employment status tool so that companies start using this to assess their workers’ statuses for tax purposes.

But guess what. Companies are just too afraid to start assessing thousands of contractors. If they get it wrong the blame is on them. So with banks on the front row, they’ve gone: “Sorry, everyone. We can either hire you as perm or here’s the door”.

It kind of makes sense. When you’re a big place you have dozens of projects that you want to kick off and shut down quickly. You want to hire/fire in a few months and make no investment to train or move existing employees around. Managing a big flexible workforce is a big benefit because it allows you to move quickly, despite the higher cost.

But now you have to manage this risk of dealing with employment status. It’s not only the financial risk but also the reputational if you get it wrong.

No surprise the majority of Outside IR35 contractors are now Inside IR35. If you don’t believe me count the red dots on the excellent OffPayroll.org.uk website.

OffPayroll contracts
How companies handle off-payroll workers

Some say that this is an effort coming from big consultancies (think Accenture, KPMG etc) who want to oust solo consultants stealing their profit share. Others say contractors should pay the same tax as an employee. But regardless of whether these statements hold true or not, this is the name of the game from now on.

Why I Like Contracting over Perm

I have been both a contractor and a permanent employee in my career. The reason I like contracting is that if you’re a skilled person, you can jump from project to project earning very good money while also building a decent network of people.

There are some minuses – you’re not paid holidays, sick leave, training courses, you’re the first to fire having often one or two weeks of notice. Finding another contract can result in some void periods between contracts and you generally take more risk. You have to prove yourself again and again in new projects and interviews.

You’re also left behind when it comes to climbing the career ladder and managing people. You have to do your own tax planning, waste some time managing invoices, explain business transactions and make sure you get paid on time.

All of the above goes to show why not everyone who says “contracting is so much better” becomes one 😉 
It also explains why the free market (without much government intervention) has decided that the pay must be higher than an employee to compensate for the minuses and that’s where we are now.

Especially for those of us on the FIRE trajectory, it can help. The money is better and allows you to defer taxes for the period where your income will be lower. Avoiding taxes (not evading) is perfectly legal and it’s what you’re doing when you put money in an ISA or a pension.

Contracting is not for everyone and here’s an article I wrote in 2017 which gets lots of hits again lately:

Why I like Perm over Contracting

As I said before, contracting is not for everyone which explains why most people prefer to stay a perm employee.

As a permanent employee, you just get paid every month a salary. A paycheck on a particular date of the month is a great feeling. Especially when others depend on you.

Paycheck stability is underrated. I cannot stress this point enough.

You don’t care if next week you’re sick. You just stay at home, recover and get paid.

Financial planning gets easier too. You can plan better if you know how much you will get paid 6-12 months down the line. It’s why banks prefer to give mortgages to permanent employees better than contractors.

You’re probably going to have contract work 3-6 months later, I’m not saying you won’t. But the psychological pressure takes its toll on some people. Whereas as a perm employee, you know you will be employed.

As a regular employee, you don’t have to stay up to date with new industry standards. Of course, you may want to do so for career development, personal interest and because you like it. Some companies will also push you and pay you to attend conferences and training just because it’s a win-win situation! But you don’t have to interview every 6-12 months and prove it.

As a matter of fact, I know a few people who prefer to stay in the same position for 10 years. And that’s fine. In the contracting space, this is less likely and not fine at all. I’m sure you know a few contractors who do this. But they’re part of the problem of why we ended up here in ‘disguised employment’ land.

As a perm employee, you need to interview only when you want to change a job or become redundant. The former is up to you but the latter is not in your control. Lots of people will moan about contractors getting paid £500 per day but only a few will factor in wasted time to find jobs, talk to recruiters, prepare and go to interviews every year or so.

Being too comfortable is, of course, a dangerous game to play. We often talk about financially independent people getting depressed because they don’t challenge themselves enough. The same applies to people and organizations too. I’ve seen permanent people become too comfortable on a good enough salary. They would only do the bare minimum to not get fired. And if shit hits the fan, good luck firing me and paying me garden leave and redundancy.

Of course, I don’t advise anyone to do that, but all I’m saying is that perm employees can get away with more comfort if they want to.

What about me in April 2020 and beyond?

I have already transitioned to permanent employment ahead of the IR35 changes of April 2020. I plan to keep my company open for the foreseeable future mainly because the market situation is very fragile at the moment and prefer to keep my options open. There are outstanding loans to my investment company which I plan to keep open for investing purposes.

I know a lot of people (including myself) want to talk about money. In the next posts of the IR35 series I’m going to talk about:

  • How much should I ask if I’m going perm?
  • Should I consider contracting as a perm after the IR35 changes?
  • How much will it cost to transition from Outside IR35 to Inside IR35 (or Umbrella) to Perm?
  • How much do I need to increase my daily rate to earn the same take-home pay Inside IR35?
  • As a perm employee, how much would I need to earn if I switch to contracting to earn the same take-home pay?

It’ll be a data-intensive post and the findings are very interesting, I promise!

A Question to you: How does your company handle the April 2020 IR35 changes? Do you prefer perm or contracting?

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14 thoughts on “IR35: Current market and Contracting vs Permanent employment”

  1. I did the numbers a few years ago (blimey just realised its 13 years ago) when I switched from contracting to Perm and I figured I could take a Salary £35-40k less than my contracting rate and I would be just fine. The numbers came down to holiday pay, training days, Employers Pension Contributions, Employers Pension Scheme Fees (0.11% fund charge and no platform fees), Employers Life Insurance (heavily discounted £18 rather than £200 per month, Health Insurance, high discounts on Car Leasing (at the time), the list added up. And I didn’t have to chase payment at the end of the month.

    Reply
    • Indeed, Simon, the difference is not so big when you factor in everything. Having said that, I think contractors, myself included, don’t really go for the full package once left on their own.

      Things private insurance, life assurance, training etc that are provided by default when you’re perm, are not always considered. But for an apples-to-apples comparison, one needs to factor in everything.

      Reply
  2. Great post Michael.

    I myself will taking some time off to let the market settle (while casually looking for my next Outside IR35 gig) as I enjoy being a contractor and my skill set lends itself well to project work etc…

    So I guess that means I like contracting. Don’t get me wrong perm has its benefits but the way I see it is even perm roles aren’t guaranteed anymore so there’s not real stability or comfort in them for me.

    Reply
  3. I’ve used to be a contractor and what I miss the most is a rapid learning curve. Different companies use different technologies, different practices. It was great, albeit stressful, to be on top of your game all the time. I think I have fallen into the too comfortable trap that you mention.

    What I don’t miss is dealing with accountants and recruiters.

    Reply
  4. Ughhh IR35! I’m looking for a contract right now and I’m having a hard time. There are still some roles outside but not many. I’ll probably end getting one inside. Worth mentioning I received an email from Qdos yesterday saying this:

    “QAccounting has developed an Off-Payroll solution for inside IR35 working where you will remain an independent contractor. You will be primarily employed by your limited company, working through your limited company and your contract remains with your Agency.

    This will allow you to continue to look for Outside IR35 contracts as the market stabilises post-April from within your Limited Company.

    This is an alternative to Umbrella or Agency PAYE.”

    Reply
  5. Interesting to read this, Michael – I’m in the recruitment industry and some of our clients have gone down the blanket route of all contractors being inside IR35, whereas others have employed the likes of QDos to review contracts, determining that they are outside. So we have a mixture of unhappy and happy contractors right now!

    I attended a couple of IR35 seminars run by HMRC recently – my view was that they care very little of the mess this is causing, they only care for the extra tax they believe they are owed, whoever pays it.

    Looking forward to reading more posts – I’m guessing that you will mention AWR (Agency Workers Regulations), which many contractors are not aware of?

    Reply
    • Thanks, Weenie. You probably know the current state better than anyone then. I plan to write more about all things numbers and the economic impact of IR35, comparisons vs perm – considering different tax strategies an Outside IR35 contractor can employ etc.

      I am not aware of the Agency Workers Regulations either! Do you mind explaining whether they’re applied in practice?

      Reply
      • AWR is applied in practice. In essence, agency workers are contractors who work on temporary contracts via agencies, usually recruitment agencies. They will be on PAYE.

        The regulations ensure that agency workers have certain rights.

        After 12 weeks, their pay/package will be compared to that of an employee doing the same job as a permanent and if they are on comparatively less, their pay will be adjusted respectively. They will at this point also enjoy auto-pension enrolment, paid annual leave.

        There’s obviously a lot more to this than what I’ve outlined, some more info here if you’re interested: https://www.gov.uk/agency-workers-your-rights/your-rights-as-a-temporary-agency-worker

        Reply
  6. Michael, Interesting article.

    Currently there is lot of confusion regarding IR35, hopefully there will be much clarity once we cross the line.

    Reply
  7. HMRC needs money. Last decades of cuts haven’t been great and they know they need to cash in somehow. Their approach is closer to ‘Shut up and pay me’, rather than ‘Let’s see your situation and assess it respectively’.

    Now that the rant is over, I do believe the contracting world won’t disappear. The main reason is that flexible workforce provides the option to deliver things faster and innovate on certain aspect of a service. Investors want to still be making a lot of money and unless they deliver some value, they won’t be making the profit they were promised.
    Investing won’t stop as there are many investors sitting on a pile of money willing to do something with it.

    It’s a matter of time for companies to catch up and for the IR35 legislation becoming more clear, before contracting comes back again. Probably not as it is now, but certainly something similar.

    What I’m most intrigued now is how a more rigid workforce, a change in trade of goods and other resources due to Brexit next year and a most likely recession, will be hitting companies and people. It does feel that this is not the time to be rocking the boat while you’re about to enter one big hell of a storm.

    Reply

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Hi! I’m Michael and I love writing about different ways to earn, save and invest our money. Coffee addict :)

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