Here’s the scene. You start a piece of work, swanning in with your expensive watch, and car. You apply your red-hot skills, motivation and experience to the task in hand and get respect from your co-workers.
At some point you’ll be socialising together, and you’ll get the question.
About twice/ thrice what you are paid now
Downside is that the longest contract you’ll get is probably twelve months, 3 months is likely. Also, be prepared to travel. And get no pension, nor holiday, sickpay. On the plus side, zero performance reviews, office politics and a change of scene frequently. You might be out of work for months, but if you have a years pay in the bank…..
My view is that if you don’t want a management career, and are good at what you do, confident and bolshy then you should be contracting.
But Bank accounts, umbrellas What?
You need a vehicle to get paid if you are a contractor. This is either (in the UK)
- An Umbrella company
- Your own Ltd
- Dodgy offshore payscheme
With the Umbrella they look after all accountancy and most paperwork – the downside is you are effectively PAYE, i.e. most of your filthy lucre is taxed at 40% and business-critical expenses such as plasma tvs and foreign holidays are difficult to claim.
However, if you are just getting your head around the idea of contracting, I’d say do this for six months
A Ltd gives you a lot more control and you’ll make slightly more money. YOU WILL NEED AN ACCOUNTANT. Should cost about a hundred bucks a month, but they’ll save you more than they cost.
Remember, what’s in the company account is NOT YOUR MONEY! You’ll pay yourself a salary that you set, and take share dividends as and when you see fit. You can also pay a partner to be a secretary and reduce tax burden, but as always the tax rules change often.
There are also likely dodgy schemes where they say you’ll take home 88% of your contract rate or similar. There’s plenty variations, but can be things like the umbrella-like company you work for doesn’t actually pay you, just gives you an interest free loan and promises never to ask for the money back. With this you are really a red rag to the tax inspector, and is only ideal if you have massive cojones as they can go back seven years to claim money back. And they also introduce rules which are retrospective (google BN66).
OK, understand that, what’s IR35?
First you have to realise the tax office hates contractors and doesn’t understand the concept of risk/ reward. It sees your fat juicy rate and wonders why it just can’t tax that at 40%.
So they have brought in rules that state if you are acting like a permie, we’ll tax you like a permie. But a permie with no pension, zero job security, holidays, and no unemployment benefit.
Theres a few ways to avoid it (maybe this isn’t clear-cut), including making sure there are no dumb clauses in your contract (most are OK these days), and also flying under the radar (paying yourself a salary of £5000 is one SQL query away from a formal IR investigation.
But how do I get a mortgage?
It’s true if you stroll into a high street bank, with your wage slip showing you earn £20K, £6K, £1, or whatever you decide to pay yourself and try and get a £300,000 mortgage you will quickly and politely get refused.
You need to go through a specialist broker Bizarrely, you might end up with a deal at the same bank, but with a better and more flexible rate. A mortgage where you can pile money into it, and take stuff out is handy as a last-resort if out of work.