There are loads of advantages to being an independent contractor in the UK. Besides having the freedom that comes with being your own boss, it can also mean more money and less tax.
Owning shares in a limited company entitles the shareholder to dividends. Dividends are taxed at different (lower) rates than salary income, making them more tax efficient. As the owner of a limited company, you are entitled to extracting dividends as long as there are profits.
Take a look at the difference between tax on earnings for permanent employment and contracting:
All figures are rounded, and are for illustrative purposes only. Actual figures applicable to any contractor making these decisions depend on various assumptions and circumstances.
Employees earn a fixed salary; tax and National Insurance are automatically deducted by their employers. Contractors, on the other hand, can structure their earnings more efficiently to take home more pay.
Generally, the higher your earnings, the more beneficial it is to work as a contractor.
Higher daily rate
It’s often possible to earn at least 15% more per day as a contractor than as a permanent employee. Demand by large companies and short-term work means that you will often be able to make more money as a self-employed individual.
Using a straightforward example, a £40,000 annual salary over an average of 230 working days equals £173.91 per day. Adding 15% will give you £200 per day.
More options of what work you do
The biggest benefit is that you have a choice around the work you accept and clients you work with.
Although contractors usually stick to office hours, they have the option to take longer holidays between contracts and these can last for months at a time. When returning to work, contractors can weigh up different contracts and choose the most suitable (or best paying) one.
This is more specialised your industry, the more freedom you’re likely to have.
Large companies are hiring contractors to avoid costs like maternity leave, holiday pay and office space as well as the risks associated with hiring employees. The increase in outsourcing means that there is a lot of work available to freelancers.
Contracting through a limited company allows you to become the owner of a business, and while there are a lot of advantages, it can be a little scary. You’ll need to take care of admin and learn a few new skills to make sure things run smoothly. Having an experienced accountant guide you through the process can take the stress out of starting a business.