Permanent or Contracting Job: The ULTIMATE comparison

Dream job permanent or contractIs permanent or contracting work better for me? Should I switch to being a full-time employee? What are the benefits of being a contractor? Which one pays better?

These are questions I ask myself from time to time. Having worked in both permanent and contract positions I have developed a more holistic view on the subject. You should definitely think of both sides before starting your career or moving on to another job.

I often see people just moving roles from one company to another without a plan in mind. Having no strategy is a dangerous thing. You don’t want to wake up one day and say, look, I’ve accomplished nothing but satisfying my employer. If you already have a long-term strategy in mind then great! Stop reading now. Otherwise…

If you don’t know where you’re going, you’ll probably end up somewhere else.

What is contracting?

We all know what a permanent role is. Go to work, spend 40h per week, get paid by your employer no matter what. Be good at your job, start managing the junior ones, climb the ladder, get a pay rise – and that’s great.

We often think of the permanent role as the only option though. So, what else is out there?

Contracting is slightly different. Instead of being part of the company, you operate as an independent professional that provides your service to the company. Usually, a fixed-term contract contains all this info, including the contract period (3, 6, 12 months). Hence the word, contractor.

Contractors operate through their limited company in a business-to-business fashion. One can, however, operate via an umbrella company, which saves the hassle at an extra cost. Enough with the introductions, let’s get to the point!

Permanent or contract work? Which is better?

Well, there are pros and cons on both sides. As with everything in life, it depends on what you want!

1. Job security

I still remember the peace of mind I had when working as a full-time employee. Indeed, job security is the top reason I’d choose a permanent role for. It is quite hard for a company to fire you unless you do something stupid.

When I say stupid I mean really stupid, like leaking company documents or installing a virus on purpose. Even if you’re laid off because of restructuring or something, you’ll usually receive a generous compensation in return. My friend who Microsoft laid off, for example, received £20,000 as a goodbye letter.

With contracting, on the other hand, expect to be looking for another gig in X months. That’s the nature of the business. Serving as part of their temporary workforce, companies want to have the flexibility to scale up and down according to their needs.

So sometimes they will hire aggressively, other times they will not renew or fire contractors. It doesn’t mean that they are financially weak. It could be that the project is over or that their permanent staff has now acquired the expertise they need. Generally, when things go wrong you’re the first to go 🙂

2. Career progression

Career progress permanent or contract
Designed by Freepik

As a permanent member of the company, you’re entitled to higher positions via promotions. Whether you’ll be the next CEO or stuck in the same position for 20 years is up to you!

Nevertheless, you enjoy the benefits of a higher salary every now and then, managing teams and more junior people. Speaking at company events, representing the brand as an expert at conferences and generally taking credit!

This is very highly appreciated by some people. The sense of reward for you and your team when reporting to the person above you and leading the people below you. It can go either way, so taking accountability on failures is part of the game too.

Contractors also do get the sense of recognition when they complete a project or the same company acknowledges their value by renewing their contract or increasing their rate.

There’s definitely recognition but no promotions unless you move to a more senior contracting role elsewhere.

If you want to climb the ladder contracting is not gonna cut it at the management level.

That’s not to say that as a contractor you cannot progress your career. Usually, contractors are quite skilled technically, because they have to!

  • You level up faster because you find yourself always out of your comfort zone. This is because you develop more skills when switching to different environments compared to someone in the same culture/company skill set all the time. As a contractor, you are forced to learn new things and adapt or change the practices.
  • You cannot ask for a high rate unless you’re great at what you do.

As a contractor, you have no choice. You need to go to meet ups, attend conferences, have a blog, and prove your value every single day.

Sometimes, as a full-time employee, you relax, enjoy the ride and do nothing to advance your skill set. You know that by the end of the month the paycheck will arrive – happy days! As a contractor, you have no choice. You need to go to meet ups, attend conferences, have a blog, and prove your value every single day.

3. Does Contracting or Permanent work pay better?

Ok, let’s address the elephant in the room. Money.

A benefit that contracting gives you is that you can charge more due to the fact you’re temporary. The company doesn’t have to pay any sickness benefits, any national insurance, any pension or vouchers for your child care! So if you’re present, you get paid. If you’re on holidays, sorry 0 pay.

With that said, it’s not unusual to see the net amount of paycheck being 1.5x times or even double that of the full-time. However, all things considered, contracting is less good of a deal. It’s STILL a good deal though.

In my sector (Software engineering, IT) it’s not unusual to see a software developer earning £500 per day as opposed to the same full-time position paying £80,000 per year. And because I’m not the type of guy who says “It’s still a good deal” and doesn’t back it up with numbers, let’s make a comparison:

Permanent employee example – £80,000 annual salary incl bonus, 4-week holidays, 1-week off-sick

As calculated by The Salary Calculator

Take home pay on a £80,000 permanent salary
Take home pay on a £80,000 permanent salary
Contractor example – £500 per day, 7 weeks off (that’s 2 weeks off between contracts, 4 weeks holidays, 1-week off-sick), 5% pension, £1200 accountancy fees p.a.

As calculated by my Excel spreadsheet. Feel free to download it and adjust the rates, expenses etc

Take home pay for a £500 daily rate contract
Take home pay for a £500 daily rate contract

Ok, so annual take home £54,179 for the permanent position vs £69,196 for the contract one. That’s a £15,017 difference.

And I’ve only calculated it the “dumb way”. I assumed that we take everything from the company every year and therefore pay the highest tax. I could only take home only what’s needed to cover our living costs and invest the pre-tax company money.

You can also add more expenses to your company (i.e. your £2,000 new Macbook) which will make the pay gap even wider.

But is this the full picture over the years? Try to convince my friend who got a £100,000 bonus last year.

In reality, contracting will give you more money in the short term, but will not allow you to climb up the ladder and go for the big fish. As we saw in career progression above, it’s only with a permanent position that you can get the £200,000+ salaries in X years time.

When you should pick contracting over perm

Permanent or contracting work?Contracting will give you more flexibility. You operate as an independent business and can even scale your team up or down, hire people and make it a proper business. Sometimes, you may want to take a 3-month holiday between contracts or want to work fewer days per week.

If you are a free soul, don’t want to be tight into a company and hate politics then contracting is for you! There are many times I have seen people acting in a political way that would make me angry if I had been a permanent employee.

As a contractor, you don’t really care about politics, as long as you deliver the tasks, get the hefty paycheck and move on to the next gig after a year or two. That’s the nature of the business.

Another benefit I’m enjoying is the professional network I’ve built. Because of the fact I’m switching environments frequently, I get to stay in touch with key people. This strong network of people has led to more job offers and recommendations in my career. Worst case, you’ll have a broad circle of people you respect to hang out with for a beer after work 😉

Moneywise, as we saw above, you will be better in the short term with contracting. Don’t expect a very high-income growth as you’d expect when getting high positions in companies. But thankfully, you may be already earning enough early on!

In software engineering, for example, one can find a few very highly paid roles (£800 per day) at a software architect level. That’s A LOT of money! However, it takes a huge expertise and a strong network (hint) to get those roles. You need to market yourself too.

Exit signYou’re never bored! That’s actually one of the main reasons I love contracting. Don’t like the company culture or the team? Move to the next one. Don’t like the finance industry? Move to fashion, e-commerce, telecommunications etc. The world is your oyster!

What about IR35? As if contracting wasn’t unstable enough, the UK government has introduced the IR35 legislation. That basically says that if you are a one-man band company then you need to pay same taxes as an employee. Same taxes without taking into account that as a contractor you’ll have to take the hit of finding new gigs, paying a pension, sickness benefits, void periods etc. Well, another government tax coming!

Speaking of money, I enjoy using my IT business for buying new things the business needs. That can be anything, from gadgets (iPhone, tablets) to magazine subscriptions and travel expenses. That’s more money in the pocket and savings from your corporation tax!

When you should NOT pick contracting over perm

Contracting is not for everyone though. People starting out will be better off getting a junior perm position as they don’t have enough experience to position themselves as experts in one field.

If you’re the type of guy that wants to climb up the ladder then definitely go for a full-time role. With contracting, you will (almost) never manage big teams or drive big changes across an entire organisation. You will be the expert people will consult but don’t expect to take any important strategic decisions etc.

I just failed at an interview for a perm role which was high up the rankings. I asked for feedback as the interview process was a multi-step project. Why did I fail? I had the technical skills and my expertise was great, but I lacked the management and leadership abilities as I had never managed people before.

Pick a permanent job and expect to take ownership. To see something grow whether that’s a team, a product or an entire company! That’s something magnificent that I’ve not experienced yet despite the 3 promising perm roles I’ve had in the past.

How are your accounting skills by the way? As a permanent employee, the company handles all accounting for you. Contractors have to:

a) find a trustworthy accountant
b) manage their pension by paying money into a SIPP (Self-invested pension plan)
c) prepare and file their personal tax return once per year
d) have a salary and dividend plan on how much to withdraw from the company
e) Purchase and maintain insurances (professional indemnity, public liability, etc)
f) Send invoices and sometimes get paid late

Even if you have a very good accountant you need to do all these things. They may sound easy to me and they indeed are after a while. But it’s because I like managing my own money and knowing how things work under the hood. If that bothers you, I won’t blame you. It’s a hassle that permanent employees don’t have and that you won’t miss if not doing 🙂

Last but not least, brush up your interview skills! You should stay at a permanent position if you like stability. A contractor will be going through interviews and looking for a new job every year. Psychologically, that’s a burden. But if you have what it takes it will give you a boost. That of not being afraid to lose your job and also knowing what the market looks like.

Permanent or contracting work? Which one will YOU choose?

If you’ve read that far, congratulations! You’re really interested in choosing the right path for you.

You have to take everything into account. Industry reputation, money, job security, career development, and generally what you feel like doing.

I’m sure I might have missed a few points given I’ve only had 3 perm and 3 contract roles so far. That’s why I’d be very keen to find out what people prefer and why. Please DO let me know in the comments.

 

4 COMMENTS

  1. Very interesting article and very timely as I repeatedly go over the same issue. Do you work directly as a software engineer? I’m guessing in London you find yourself mostly in finance roles? It’s a move I want to make in future but unfortunately Northern Ireland doesn’t have the largest contract market for my kind of position.

    I myself specialise in automated testing which has worked out well in terms of career progression. I’ve often been put into leadership positions but I’m not too sure it’s for me as you end up being removed from the craft and essentially just dealing with people exclusively.

    Switching so it’s all about the work I produce is VERY tempting, if we’re lucky enough to have good finances, I may do this so I can cut down on hours.

    That said, my friends contracting all seem to have abysmal roles except one guy. I also worked in banks in London and predominantly these systems are old beasts that have been made the most obscure spaghetti so contractors can stay on. What has your experience been like?

    • Hi Nick! My experience has been good with contracting in London so far. I have been lucky enough not to work with very old systems, but have heard from people who have.

      It’s true that legacy systems can be a contractor’s nightmare but I’m trying to avoid that as much as I can. A legacy system will not progress your career either and will only make the next gig harder to find!

      London’s high rates are indeed mostly in the finance sector, but the rate doesn’t have to be very high for a contractor to earn good money.

      It’s positive the fact that you try to stay technical while maintaining some leadership. In my opinion tech jobs will never go out of business, but project managers, scrum masters etc are more fragile… I believe a tech architect contract is somewhere in the middle but also more rare to find!

  2. Hi Michael,

    I really enjoyed the article.
    I especially agree with your comment: “In reality, contracting will give you more money in the short term, but will not allow you to climb up the ladder and go for the big fish”.

    However there is a thought spinning in my head.
    Do you think that contracting in IT is different than contracting in Finance?

    To my understanding IT will drive you either climbing up the ladder (career oriented) or contracting (money oriented). On the other hand contracting on Finance/Business roles may harm your CV.

    Maybe i am mistaken, but I think that contracting in a Bank, on a NON IT role will make others put an eye on you… In the end of the day an IT role should be filled by a contractor as the bank is a financial and not a tech institution, but a solely business/finance role should be perm as the knowledge should stay in the bank.

    I would like you to share your thoughts on this, because I am currently contracting in banking on a business role for the last couple of years and I wonder if this will be a drawback in my CV.

    • Thanks for the great comment Nikos. To be honest, I’m not in the finance sector and cannot comment with certainty but it looks like a supply and demand problem to me. Let me explain.

      Because of the tech boom, there’s a higher demand for temporary workforce in IT which drives rates higher. Now there may be higher supply in the finance sector which makes contractors take less popular roles or boring positions.

      But regardless of the supply and demand, one will only harm their CV by taking contract roles that are totally opposite to what they want to do in the future. If the role is not aligned with your career goals and it’s just for the money then your CV won’t look good whether you’re in finance or IT.

      A good contractor in IT can still have a great career since people around him will either offer higher positions (probably perm) or higher rates or both. I believe the same applies to the finance sector. A skilled contractor in finance can be offered better positions and a higher salary 😉

      GOOD finance contracts may be harder to find compared to IT ones though.

      The argument that knowledge should stay in the company is a very important one that I didn’t mention… You’re right. But that’s what the company essentially pays for hiring someone that can do the job immediately rather than training the existing staff to the job. Again, I’m not entirely sure about the finance sector so if any readers know more, please enlighten us!

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