As part of my work I mentor and support people looking to run their own businesses, or who want to become an IT contractor. This means I get a fair few people come up to me with excitement, ‘I’ve decided – I want to go contracting.‘
Disclaimer: I am no accountant, nor am I a lawyer.Â The calculations below are rough and based on basic research, and there are big differences between sole trading and running Limited companies, so pleaseÂ take appropriate advice.
Update: Self-employed people might be entitled to Statutory Pay for sick &Â parental leave.Â For specific advice the above rules apply – speak with an expert about your specific circumstances.
The most common reason is money. Employees see contractors comeÂ in, they find out how much these people are paid, and envy creeps in -Â They’re being paid so much more than me.
The wannabe forgets some important points:
1.Â The price you hear is most likely the pre-tax price. After all the earnings contractors are going to have to pay National Insurance, employee taxÂ andÂ (in some circumstances) employer NI. They’re also going to have toÂ pay moreÂ into pensions,Â something your employer would likely otherwise help with. Employers usually pay 13.8% NI on top ofÂ the employee’s contributions. That’s going to be your problemÂ now.
2. There’s no sick pay. No holiday entitlement. By my rough calculation, if you take just the statutory holiday entitlement of 5.6 weeks with bank holidays rolled into that, that’s nearly 10% of your available working time. To reverse that out, you need to be earning 7.6% more than a full-time salaried person just to cover statutory holidays. That might not sound a lot, but it all adds up – and this is just the bare minimum.
3. Thinking of starting a family? No maternity or paternity pay for you.
4. Insurance. You’re going to need to pay that yourself. Accountants’ fees. Yup, that’s your responsibility as well. Legal costs – you’re going to want a solicitor to check your contracts.
5. Finding work. A good number of people turn to contracting because they’ve found an opportunity. This is fine and dandy for the first few months but you’ll quickly realise why businesses like contractors. They’re easy to get rid of.
Come the end of your contract you’ll need to try and renew it, or find another gig. You need to become aÂ salesperson. For all the time you’re selling; trying to find a new job, you’re not earning. If you’re in a full-time contract that means looking around in your spare time or sneakily getting calls in at lunchtime. If that contract ends and you’ve not found a new one, you will earn nothing, zero, zilch. You get no redundancy pay, and termination clauses on your contracts might bring an unexpected early end to what you thought was a cushty little job.
To summarise: contractors get paid more because they have to spend more. Their liabilities areÂ far greater than employees’. The rate they’re paid is not even comparable to your gross salary, because they’ll have employer liabilities and costs as well. The risks are high, and you need to do your sums carefully before becoming a contractor. It’s likely less lucrative than you think.
The second most common reason is freedom.Â I want to be my own boss.
Contractors aren’t bosses. They’re expendable labourers. Put some effort into your personal brand (yes – marketing) and you can become a consultant, usually with a better rate and slightly higher esteem among your clients, but you’re going to have to work for it and have a higher work turnover.
I might pick up the contractors vs. consultants issue on a separate post, since it’s an issue close to my heart. But it’s not for now.
Simply put, if you want to be your own boss,Â be very careful about how you present yourself. Contractors fill gaps,Â have bosses and generally get told what to do. Consultants come in (usually after stuff hits the fan) and get told to figure out how to fix things. Both have limited autonomy, and your decisions can be vetoed, overruled or simply ignored.
So – you still wanna be an IT Contractor?