Dave Chaplin, CEO, ContractorCalculator:
If you can remember before you were a contractor, think back to your last position as a full-time permanent employee. Do you recall how much in taxes you were paying? Did you even think about the difference between the gross salary for your role when you applied for the job and how much you actually took home?
And not only were you paying income tax and National Insurance Contributions (NICs), but you were paying even more tax for all those employee benefits, as a benefit in kind. On top of all that, your employer was paying even more in Employer’s NICs, which they consider as a direct cost of employing you.
So, thinking about what you really earned as an employee it was technically much more than your gross salary, but a huge amount of it was taken away in taxation – what an expense.
When you are a contractor, you can generally expect to be paid the permanent employee equivalent of not just the gross salary plus employer NICs, but probably more than that because you are a contractor and external supplier.
And the best thing of all is that, assuming you are working outside of IR35 through your own limited company, you can legally avoid most of the National Insurance payments by paying yourself a lower salary and taking dividends from your company’s profits.
If that was not enough, you can also charge all sorts of expenses, like travel, subsistence and equipment, back to your business; if you were a permanent employee you would have to pay for these out of your own pocket from the net pay you’ve earned.
Working as a contractor it is possible to significantly reduce tax expenses to both your business and your personal income tax. So much so that you can easily afford to buy yourself all those ‘benefits’ you might have enjoyed as a permanent employee. That’s because your net earnings are so much greater. In fact, the cost of many of these benefits you buy for yourself is also tax deductible!
Plus, of course, you have the flexibility to take as much time off between contracts as you like and can afford. And you can probably afford to take quite a lot of time off if you fancy it, because when you are working on a contract, you are earning so much more.
If you can go contracting, then why on earth would you want to be remain a permanent employee?