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​Contracting versus employment: Which one is best?

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A company may hire a contractor or employee to perform the same task(s), but many differences exist between these two work arrangements. From pay structure to tax requirements, it’s important to be mindful of these factors when deciding which type of work arrangement is better suited to your career. We’ve outlined the key differences and benefits of each below.

At a glance

Also known as a ‘freelancer’ or ‘independent worker’, a contractor is a self-employed individual who is hired to complete work for a client within a specified timeframe. A contractor may conduct work for one company or multiple companies simultaneously. Subcontracting work to other professionals allows contractors to take on more projects. We have contract jobs on offer for a wide range of careers, some of the most common being accountants, engineers and project managers.

Employment tends to indicate more permanency: a company hires an employee to perform a specific role under a full- or part-time contract. In turn, the company is financially obligated to the hired individual – coordinating the employee’s salary, tax contributions, holiday pay and more, depending on the contract’s stated benefits. Benefits may include pension contributions, medical insurance and company share options.

An individual may be both an employee and a contractor. Many people conduct contract work as a secondary job as a way to earn extra income. In fact, contract work has become increasingly popular. In the UK, the number of individuals partaking in contract work increased by 46% between 2008 to 2017. Technology advancements have likely contributed to this rise; video calling applications and accounting software, for example, have made freelance work more accessible.

Flexibility and workers’ rights

Contractors have more flexibility than employees. Employers can lawfully dictate employee work hours and holidays, while contractors have the freedom to choose their own. Improved work-life balance is a catalyst for many people opting to commence contract work – freeing up more time to spend with family/friends or indulge in hobbies.

But with greater financial security, employment remains a popular avenue. Under UK law, employees have protection from certain rights that do not apply to contractors. These include:

      statutory sick pay

      statutory maternity, paternity, and adoption pay and leave

      statutory shared parental pay and leave

      minimum notice periods

      protection against unfair dismissal

      the right to request flexible working

      time off for emergencies

      redundancy pay.

Without this protection, contractors must be financially savvy – accounting for periods away from work (both expected and unexpected) and future-proofing other financial plans, such as their pension.

Contractors, therefore, are generally considered high risk when applying for financial support from banks and other institutions. Employees are more likely to receive more favourable interest rates on long-term loans, such as mortgages.

Pay, tax and job security

Employees negotiate pay at the start of their contract. Payment is then made via Pay as You Earn (PAYE), a system in which tax and national insurance contributions are also deducted. An individual’s tax code will determine what percentage of their income this will be.

Contractors are free to determine their own fees, reflecting their skill set and experience. Often this is higher than what could be earned under an employment contract. In the UK, the average contractor earns a salary of £85,570, 222% higher than the average salary for full-time employees (£38,600).

Unlike employees, however, contractors are wholly responsible for paying their Income Tax and National Insurance contributions. They must complete a self-assessment to HM Revenue and Customs (HMRC) annually; this will indicate how much an individual owes.

Certain industries benefit from government schemes that can help boost financial security for contract workers. The Construction Industry Scheme (CIS), for example, enables contractors to pay a subcontractor’s national insurance contributions directly to HMRC. These contributions are deducted from the subcontractor’s pay.

Any individual who engages in contract work must submit a self-assessment, even if they also pay tax via PAYE as an employer.

In summary

Both work arrangements have advantages; the right choice for you will come down to your unique situation and career stage. While more risk-prone, contractors have greater flexibility and the potential to earn a higher income than employees. Employment, however, may be more suitable for those seeking workers’ rights protection and improved job security.

Curious to know more about contracting versus employment or explore the next step in your career? Get in touch with your closest Orion Group office today.