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.
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.
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?