Have contractors just been hummed in the budget

[skahigh]

zippy3x said:

Yes they do, they can go contracting. If it's really only the same then why not?

It's not happened often but I have had these sorts of conversations with permies over the years. Most contractors argue along the lines of many on here, no sick pay, pension, holidays, job security etc.

I take a different tack.

I tell them it's brilliant, get paid well for more or less the same work, expenses paid before tax, no office politics.
I them offer them advice on setting up a ltd. and getting an accountant.
Advice on doing your best putting yourself outside IR35 (even though the rules are intentionally vague and change often) so the tax man doesn't come knocking with a big bill one day in the future.
How a 12 month contract with a two week notice period is really a 2 week rolling contract (and they would need to go to court to even enforce that).
How they will need to brush up their CV and interview skills because they will be doing it more often.
To put some cash aside for the lean times like in 2009 when I finished a contract and there was literally one contract in the entire country, or the time I gave notice on a contract to start a new one and turned up on day one to find there was no contract.
I tell them that the extra money means I can work anywhere I want, working away from home during the week. early Monday morning and late Friday commutes.

I have yet to have one single permie take up my offer of help. They always want to wait another year until the mortgage is more manageable or their car loan is up, or some other reason.

Contractors and permie may superficially look the same, but the level of risk and flexibility assumed and offered by contractors is obviously very different, and obviously in demand from industry.

Good post, permies (I was one for 10 years) tend to see contractors as doing the same job for more money whilst also paying less tax.

Thing is, we don't do the same job! We provide a service for as long as that service is needed and as long as we choose to provide it, we have (nor do I want) any employment rights or obligations other than those of our own limited companies which, we also have the time and expense overhead of running legally and effectively (Annual return, corporation tax return, quarterly VAT returns, monthly PAYE returns, etc. etc.).

Yes, I pay a smaller percentage of my companies income in tax than an employee would on their salary but, the actual tax take is broadly similar because here in Cardiff, my earning potential as an employee is significantly lower than my earning potential as a contractor.

I then have to pay my pension (because I don't work for a company paying in to one for me), cover my household bills if I'm sick or can't find work, pay my accountant to manage the books for me properly, pay business insurances, etc.

I do this because it gives me control and freedom in my working life and allows me to ignore all the things about employment that I dislike such as having a manager to report to and KPIs to meet, training requirements to achieve, etc.

I am my own boss, tax dodging has nothing to do with why I have no desire to return to employment.

[pherlopolus]

paulrockliffe said:

That may be true, there's a separation between you as an employee of a company and you as an owner of a company. But there's no way the you as an employee of your company would do the work you do for the amount that you are being paid. To put it another way, if your company decided to employ someone else to do your work, how much would you have to pay them?

The reality on the ground is that far more of your income is salary than you choose it to be and you make that choice for tax reasons. Now, I don't blame you for that, but I see it as the Governments role to make the rules that are fair for all in society, which this is a part of.

My personal choice would have been to equalise the rates by weight of tax receipt so that it was fiscally neutral, rather than using it to pay for social care, but the principle behind the decision is sound.

I am only an employee of my company as a direct result of me being a director though... As an entity (personal and business) I pay roughly the same (if not more) amount of tax a permie employee would in a similar role. My company has a turnover much more than a normal employee would have, but this covers the costs of running the business as well, and the expenses of working 130 miles from home etc which if i was an employee would be paid for by the company - and probably cost more as I use lower cost hotels and eat cheaply.

People always assume that contractors are in it for the money too, which is often not the case - it's just a happy side effect.

[zippy3x]

Another thing that annoyed me about the budget speech was the idea that contractors set up Limited companies to avoid tax.

That is totally and demonstrably wrong.

I'm not a tax lawyer, but I believe there are 3 ways you can work for someone else.

An employee - irrelevant as that is not what the client wants.

A sole trader - No company (that is in any way knowledgeable of tax/employment law) or agency (because they are the contractor's client if they are involved), will allow you to work as a sole trader. If they did they would be potentially liable for employment benefits.

Limited company - This is the only structure that is permitted by client and/or agencies.

So no Philip, we don't set up limited companies to avoid tax, we set them up to get work.

[Tonsko]

Good shout - not getting involved in office politics (and more importantly HR reviews) was one of my favourite parts.

[anonymous-user]

I contracted for 6 or 7 years as a software developer around the time of the .Com boom (early-mid 90's). Getting contracts with little more than a telephone interview. It was a really fun time working with all sorts of startups and big companies alike. IR35 didn't exist so it was divvies all the way.

Then around 2001 the market dried up so I became perm, concentrating instead on climbing the greasy pole. Now I earn good money with excellent company benefits and really glad I made the change. Being a permie isn't for everyone but on the other hand not everyone wants to be a 40 yo computer programmer either.

I'm glad they are closing the tax loopholes and making contractors pay the same as everyone on PAYE. I hope IR35 is properly enforced also. If it really is a lifestyle choice, you'll suck it up and stop bleating about how unfair it all is.

[jonny996]

interesting reading. From a hiring point of view there is very little cost difference to a company to have a perm or contractor do the role.
Contractor is very simple. 48 X (5x day rate), no need to worry if you have a basket case that is always off sick ect. Simple pay as use them concept.
Perm, you have training, benefits, pension, Employer NI, sick leave ( I bet they have more sick days than contractor) HR costs & then you have to put aside a months salary for every year to cover the redundancy.

[johnfm]

swerni said:

rustyuk said:

By rate do you mean the same % or same amount? Most contractors pay more tax than an employee but as a % it is less. For that % we get no employee rights what so ever.

Good for business (less employees), good for HMRC (more revenue) and good for the contractor (a bit more cash and lots of freedom).

I'm just on PAYE and jealous.
I'd love to be paying myself a dividend and taxing it at 20%
Plus the ability to offset stuff

And pay your wife and kids at the NI threshold.

And pay them dividends.

[johnfm]

zippy3x said:

Another thing that annoyed me about the budget speech was the idea that contractors set up Limited companies to avoid tax.

That is totally and demonstrably wrong.

I'm not a tax lawyer, but I believe there are 3 ways you can work for someone else.

An employee - irrelevant as that is not what the client wants.

A sole trader - No company (that is in any way knowledgeable of tax/employment law) or agency (because they are the contractor's client if they are involved), will allow you to work as a sole trader. If they did they would be potentially liable for employment benefits.

Limited company - This is the only structure that is permitted by client and/or agencies.

So no Philip, we don't set up limited companies to avoid tax, we set them up to get work.

They don't set up as Ltd Co to avoid tax - but it is a natural consequence. Especially those with spouses and children.

[remkingston]

zippy3x said:

Another thing that annoyed me about the budget speech was the idea that contractors set up Limited companies to avoid tax.

That is totally and demonstrably wrong.

I'm not a tax lawyer, but I believe there are 3 ways you can work for someone else.

An employee - irrelevant as that is not what the client wants.

A sole trader - No company (that is in any way knowledgeable of tax/employment law) or agency (because they are the contractor's client if they are involved), will allow you to work as a sole trader. If they did they would be potentially liable for employment benefits.

Limited company - This is the only structure that is permitted by client and/or agencies.

So no Philip, we don't set up limited companies to avoid tax, we set them up to get work.

Not all sectors would agree. Construction for example.

[pherlopolus]

swerni said:

Nope, 20% rather than the rate of income tax

actually more, due to the new 7.5% tax on divi's too, so it's corp tax of 20% the company pays, and 7.5% that the individual pays. with 2k a year (from next year) being tax free, once over the higher rate threshhold it goes up to 32.5% personal tax.

[pat_y]

pherlopolus said:

swerni said:

Nope, 20% rather than the rate of income tax

actually more, due to the new 7.5% tax on divi's too, so it's corp tax of 20% the company pays, and 7.5% that the individual pays. with 2k a year (from next year) being tax free, once over the higher rate threshhold it goes up to 32.5% personal tax.

Thanks for chipping in with the real story there, that invoice that gets submitted to the client every month may look impressive, but after you've removed around 35% ish total taxation (estimate depending on personal position),+ removing travel expenses (costs of living away from home) extra rent on second place, fuel bill, insurances etc etc, it's not looking quite so rosy. As others have demonstrated the rate increase over Permie really covers the ballache of running your own Ltd Co, and travel and felxibility that contractors provide.
I'm hoping a small increase in rates on offer may help to offset, alas i think i may be waiting a long time.
Still wouldn't go back to permie...not yet anyway.

[Moonhawk]

swerni said:

Nope, 20% rather than the rate of income tax

So - the same as anyone else who earns dividends on shares then.

edit: and as the poster above points out - it's not 20%.

A dividend can only be paid out of profit the company has made - which has already been taxed at 20% (corporation tax) - so the actual amount of tax payed on the dividend (by the company and the individual) is far more than 20%.

Edited by Moonhawk on Thursday 9th March 13:37

[ClockworkCupcake]

pherlopolus said:

Tonsko said:

But that is where the saving comes in from unscrupulous contractors, who's company earns 80K plus, they pay themselves at the no tax threshold and draw the rest in dividends (which used to be a lower rate than PAYE years ago.). Presume this is a tightening of the rules as IR35 has been such an abject failure.

There is a huge misconception about contracting, I pay the correct amount of tax and NI based on my role as a Director of a Ltd company, I don't see anything unscrupulous about running a micro business effectively

Indeed. The grass always appears greener on the other side.

Whenever I get stick from permies about how I appear to earn so much more than them for doing the same job, I ask why they too aren't working this way and offer to mentor them through the process of setting themselves up in business as a contractor (as I have done several times for people over the years), but also cautioned them about how much they will be giving up in order to do so - the aforementioned paid holidays, sick pay, non-contributory pensions, bonuses, perks, and the like. It's amazing how their resolve falters at that point.

Also, it isn't until you start to run your own company that you realise just how much tax is paid to HMRC on your behalf that you never even see on your payslip. I would imagine that most PAYE Employees don't even realise there is an Employers NI that is paid by their employer, or think that it is just something the company pays. When you are running your own company which has but one employee, you understand the true tax burden.

Yes, of course there are financial rewards for walking the tightrope without a safety net, otherwise we wouldn't do it, but those rewards shrink each time one of these "adjustments" are made and the tipping point is fast approaching.

Contractors offer a fairly vital service, as I pitched to a small company who were a client for 6 months. They were thinking of hiring someone but were worried that they didn't have the cashflow to justify it and were worried they would have make them redundant again. They were worried about all the admin and other hidden costs. I suggested they hire me (through my company) and there would be no hidden costs outside my hourly rate. When the work was done, the contract would end, and that would be that. No redundancy payments, no paying me for work that wasn't being done (due to holiday or illness), no pension contributions, no Employers NI. They just pay me for the work I do and that is that, no different from hiring a plumber or a lawyer or whatever.

As a permanent employee, it's so easy to get fixated on what you think a contractor is earning when you learn their rate but until you understand the true costs then you are comparing apples with oranges.

[Sir Lord Poopie]

0000 said:

It seems to me they're out to at least reduce the amount of contracting, self employed, etc.

I don't get why.

Take away the 'benefits' of contracting and get the plebs back on PAYE. Tax em at source.

[rustyuk]

Sir Lord Poopie said:

Take away the 'benefits' of contracting and get the plebs back on PAYE. Tax em at source.

I really wish all contractors at HMRC would down tools and walk out.

[PurpleTurtle]

Sir Lord Poopie said:

0000 said:

It seems to me they're out to at least reduce the amount of contracting, self employed, etc.

I don't get why.

Take away the 'benefits' of contracting and get the plebs back on PAYE. Tax em at source.

Problem being that if you do that, Global Megacorp Inc has to provide those 'Plebs' the full salary and benefits package at the market rate.
Oh, and if there's enough of them they'll get smart and get unionised, nothing like a bit of collective bargaining to up the stakes in the the world of 'them' and 'us', up the workers and all that. What does Global Megacorp do to mitigate against this? It can't fire 100 skilled, hard to find workers that it needs because it will go out of business. Perhaps it will just put its prices up. Prices that Sir Lord Poople pays at the checkout. He won't mind after all, as long as those Plebs are back on PAYE.

Or, back in the actual real world, does Global Megacorp (probably with a number of MP's as non-Exec directors and 'advisors', all after a bit of ye olde Profit Maximisation) say, 'hmmm, you know what, that headline rate for Joe Contractor looks a bit high, but it's actually LESS than it would cost us to employ him long-term if we got into all that nasty business of a permanent job with security and all those unfortunate non-salary add-ons that everyone forgets about when spouting bks on the internet. Let's just offer him a contract, divide and conquer, if he gets lippy about the rate we can just terminate him and he walks. I think they call it 'the flexible labour force' these days.

Incidentally, I've never met a contractor that I would describe as a 'pleb'. However I've met plenty of deadwood permies stuck in a rut, knowing that nobody else would hire them, chained to a slowly-eroding company pension that they can't better elsewhere, but unfortunately for their employer are too costly to make redundant, despite their lack of productivity compared to motivated contractors.

[Moonhawk]

BoRED S2upid said:

I have a contractor mate (IT geekery) technically taking home minimum wage but actually earning something ridiculous like £500 A DAY!

The £500 a day - is that what he pays himself - or what his limited company rate is?

To pay himself £500 a day (or £130k per year based on a 5 day week) - whilst only taking minimum wage of £11,000 to avoid income tax - he'd have to be taking 119,000 out of the business as dividends. The first £5000 of these dividends is free from personal tax, but has had 20% corporation tax paid on it as dividends can only come from profit the limited company has made.

So in essence he pays himself £16,000 pa which attracts no income tax but he's still payed NI of £353 on the income and £1000 corporation tax has also been payed on the 5k dividend.

The remaining £114,000 he needs to pay himself to get him to £130k must now be paid in dividends. These are also subject to corporation tax of 20% (which works out at £22,800). Then he has to pay personal tax on the dividends as follows:

• 7.5% on any dividends that take him to the high rate tax threshold of £43k (i.e. £27k is taxed at 7.5% = £2025)
• 32.5% on dividends above the high rate tax threshold (i.e. £87,000 is taxed at 32.5% = £28,275)

So if your mate is paying himself a £500 a day salary as a combination of pay and dividends - the total amount of tax paid to do this is around £54,453

I have just put a £130k salary into this tax and NI calculator

http://www.moneysavingexpert.com/tax-calculator/

It says a permanent employee earning a salary of £130k would pay £51,533 in tax and NI.

Edited by Moonhawk on Thursday 9th March 14:29

[PurpleTurtle]

swerni said:

I'm just on PAYE and jealous.
I'd love to be paying myself a dividend and taxing it at 20%
Plus the ability to offset stuff

What exactly would you offset (that is a legitimate business expense) that your accountant - an additional expense of contracting, mine charges me £780 a year, mates rates - will sign-off on?

[johnfm]

PurpleTurtle said:

swerni said:

I'm just on PAYE and jealous.
I'd love to be paying myself a dividend and taxing it at 20%
Plus the ability to offset stuff

What exactly would you offset (that is a legitimate business expense, that your accountant - an additional expense of contracting, mine charges me £780 a year, mates rates - will sign-off on)?

As above - he'd offset his wife and kids at £9,600 /year each for a start...

[ClockworkCupcake]

swerni said:

I'd happily pay 35% tax a year.

So what's stopping you?