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Contractor vs Employee

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Uncertain if making the move into contracting is for you?

For many people, the idea of working as a permanent employee as opposed to a contractor, would mean a lot more security by knowing that a set wage is coming in every month.  However, the times are changing, particularly with the growing economic uncertainty, so is there really such a thing as a secure permanent position anymore?

Contracting is being used less as an avenue for those people forced into redundancy and is now becoming the chosen working style for many.

Of course with most things in life there are both positives and negatives, and the same can be said of contracting. Here are a list of the advantages and downsides that come when making the move into contracting:


  • An average contractor rate can easily be double that of a full time employee, or even more – as the client is not required to pay for your holiday, travel, sick pay, pension contributions or any employee benefits.
  • Unlike permanent workers, you are able to claim back on expenses that are made wholly and exclusively for the purposes of your business, and, as you only get taxed for your profits, this can lower your tax bill.
  • You have the freedom to work when you choose, where you choose and for however long you like.
  • The company that you work for is not your employer, but is instead your client, meaning you have far more control over your contract than what a permanent worker would have. This means that you will have a lot more flexibility and control over agreeing working conditions and negotiating payment terms.
  • Taking holiday will be a lot easier, as you will not be in the position of having to juggle your days off around other colleagues. You can also choose to have as much time off as possible, instead of the standard few weeks in a year.
  • Dealing with a variety of different clients will give you the ability to build up a wide-ranging skill set, CV and allow you to establish an extensive list of references.

A few downsides

  • Of course, becoming a contractor never means that you are guaranteed work and so this is a factor that you must take into consideration.
  • Contracting is an extremely rewarding way of working, but being your own boss does mean that you have a lot more responsibility than a permanent employee, which includes having to be in charge of your own finances. This can be worrying for some people, knowing what forms to fill out and when, but with the help of a good accountant this won’t be an issue to be concerned about.

How to contract?

There are two options recommended for contractors – to either trade through your own Limited company, or through a PAYE umbrella company.

Any accountant will tell you that contracting through your own Limited company is the most tax efficient way of working, this will typically see you take home around 75% – 80% of your contract value, compared to around just 60%-65% of your contract when working through and umbrella company.

However, there will be a number of factors that will mean one will suit you better than the other.  For example if your contract is short term and less than a certain limit, then you would probably be better off trading through an umbrella company. To see which way of contracting would suit you please get in touch with City Accountants, we can provide expert advise based on your personal circumstances.