Is contracting for me?

So I guess even before thinking of accepting that contract its worth looking into if it is worth going contract on a particular rate?

Examples are good, I like clear examples so I shall endeavour to give the reader one.  There is enough HR waffle involved in this sort of thing normally!   So take a £50k Perm IT position.  To equal that on a daily rate would be in my estimation approx £220 p/day.  I get to this number by looking at working 230 days per year.  This magic number is taken from 260 possible working days.. 365 * ( 5 /7 ).    Then you need to take account of the 8 or so public holidays you probably won’t be able to work.  Then in order to have a life you will need 22 days holiday per year.  I am not factoring in sick pay is if you are an ill / sickie kind of person then I would really recommend staying perm.  The occasional sick day will have to be taken out of holiday in my calcs.  Unlike in the perm public sector ( pfff  ;P ) where if diddums is ill while on holiday you can claim it back.  Unbelievable!    Ta-dah 230 days..

Anyway so 50,000 / 230 =  £217.40  i.e. £220 p/day.     Now this must be the absolute base point.  Less than this is insane unless you are getting a great new skill or cracking into banking for the first time and are going to be able to get contacts etc.  Lets leave things like for like shall we.

So we need to put a value on ( or monetise to be all finance-y about it ) the perm benefits.  So as an individual you will need to buy the cover above you think appropriate.

  • Private Medical – £100 pcm
  • Dental – £40 pcm
  • Pension – 10% Gross salary £400pcm
  • Illness / Death in service cover – £50 pcm
  • Holiday Pay – included in initial daily rate calc
  • Sick Pay – as above
  • Greater than statutory pay on M/Paternity / Long term sick / Jury Duty – unknown
  • Employee share schemes – again hard to say, but certainly factor in the loss on any unvested shares you may lose by leaving and not perhaps compensated by a new perm offer
  • Gym – £50 pcm

So lets add up what we can …   £640 pcm is what I get from the back of the napkin figures I have got right here and that I have put a value on.   So yearly we are looking at  £7680, so lets call it £8k and while we are at it lets lump on for this case £2k of intangible stuff / extra for risk to make it £10k.

This all boils down if you are on the £50k you really need to be getting up to the £60k mark, so £260 p/day to make this worth entertaining.   I would also say that bonuses even in IT can be fairly tasty in some banks so again its worth putting this in to your calculations along with the internal mobility and promotion prospects ( which to be frank are much hyped but I find to be truly awful in most places ).

If you want to get a pay rise or promoted?  Resign.    Strange but true.   You should get a counter, if not then possibly they didn’t think much of you anyway, best off out and bucking your ideas up elsewhere.

It’s not all bad news though, on higher scales than this it is quite possible to be more tax efficient.  I do *not* mean evade here.   I simply mean that the smooth with the rough is that you do not have to give away a large percentage of your earnings in the 40% tax bracket.   If  you get a good accountant, and I recommend that you do for these reasons.

  1. They can save you a lot more money than you pay them
  2. If you muck this up you WILL get a bill at some point down the road that unless you have monk / nun like abstinence abilities you have already spent.   HMRC / IRS will hunt you down and get you.  They are only marginally outperformed by Death with his big scythe.
  3. You will want to damage things when your self assessment form comes in at the end of the year and you have no clue what is going on.

I am no tax advisor and all advice comes with a ‘caveat emptor’  (buyer beware) so beloved in the markets.  If you get a good tax advisor then you will be well placed.  I would NOT recommend the very tempting ‘Managed Service Companies’ that promise > 80% of pay take home.  Their fees are normally large and it is very obvious that you are an employee in disguise that is evading tax in some clever shell.    If it looks to good to be true it most likely is.  This is the next big target from HMRC so watch out.

As a recruiter I trust told me.  “Anything with Benefit Trust, Director Loan, Preferential Loan,  Discretionary or benefit in kind bonus payments or other P11D trickery in is bad news.  If it was that easy the investment banks themselves would be doing it for THEIR employees.  Think about it.”

I must dig out the case going on at the moment as a salient point.

Again back to the good news.  If you are via your own limited company and with good advice and you don’t sail too close to the wind all should be hunky dory.  Another comforting thought is that to bring about legislation that will screw you, screws all small companies at the same time.  That is a lot less likely than some shady pay scheme being tax investigated.   With umbrella’s I take these as fine as essentially you are PAYE but just relying on the uplift in contract rates while still paying tax via PAYE with the most minimal reductions.

I would say if your contract gross is near or > 1.5X your PAYE gross it could be a good move.    You will pay less tax so that extra money should be taken into account.  Along with the fact that stuff you use for work and any training you may buy (including those mega expensive Masters courses trading desks so like some Quants / Quant developers to have) can be written off against tax along with VAT on some things.  Ask your accountant but if you have some big education / training bills coming up or maybe for the last couple of years it can be a swinging point.

Corporation tax is 25%  so getting dividends is better that the PAYE tax if you go over 40K and into the 40% band.

So if you are on 50k + some bonus + bens and a 300 p/day job comes up?   £300 * £230 -> £69k   … it may be worth it.  If its £500 p/day + then its a pretty easy answer!