Are you better off as a contractor or consultant in 2022?
Inside IR35 jobs have made skilled contractors question if they can even afford this method of employment. What’s the point if you are no longer self-employed? Are forced to become an umbrella employee, which, for some, has meant late salary payments, unpaid holiday pay alongside their personal data being leaked on the dark web?
Working inside IR35 not only leaves contractors essentially in no-rights employment, according to IPSE; it also has significant financial consequences: four out of five contractors (80%) working inside IR35 said they had seen a drop in their quarterly earnings – by an average of 30%. A quarter of contractors affected even said their income had dropped by over 40%.
But some contractors prefer working as a PAYE or umbrella company contractor to avoid tax filing paperwork associated with running a limited company or PSC. They just have to weigh up the quality and annual cost of the umbrella company’s accounting service, pension plan, holiday pay structure and monthly payroll fees compared to that of running a SIPP and an accountant for your tax affairs.
According to umbrellabroker.com, under a PAYE agency, the contractor has no choice when it comes to which contracts they work on. The PAYE agency sources and selects projects and the contractor must carry these out.
On the other hand, contractors operating through an umbrella company are free to choose which contracts they work on and when. For contractors that prefer a greater level of freedom and flexibility, this often means that an umbrella company is the better route, said the website.
Blanket bans of private-sector contractors working through their PSCs/limited companies have pushed many workers inside IR35 roles since April 2021, and as such forced them to go the umbrella route.
Accountants handling limited company and personal self-assessment taxes can charge more than £1500 per year, including a registered mail service. When umbrella companies charge on average up to £30 per month, the annual cost is slightly less. But as the IPSE findings have pointed out, inside IR35 roles are taking a chunk of earnings out making it harder than ever for contractors to make ends meet during the cost of living crisis.
Are you assuming a false sense of financial security?
Many contractors who work through recruitment agencies and fixed-term contracts could be under the false assumption that they are at less financial risk than a permanent worker or even a consultant that finds work independently and for several clients at the same time.
At any stage of a project or company’s stage of maturity (startup to FTSE 100-listed), earnings could drop abruptly if someone is let go suddenly or part of a project is delayed or even dropped.
When you are truly independent you arguably have more influence over how and when you can network and upskill. You also do not have to wait for a senior manager to greenlight your advancement or training, you can do that if you set time and money aside to advance your skills and as a consultant, you can expense the cost.
“The income risks of freelancing versus holding a full-time job are simply more visible rather than greater,” according to Erik Stettler, an independent New York finance expert and data scientist. “Income may fluctuate for independent contractors, but there is far less risk that earnings will abruptly drop to zero—the way they would if a full-time employee were laid off unexpectedly.”
He continues, “Freelancers are also able to directly influence their own income flows by networking, upskilling, and seeking out more clients. While similar efforts may help increase the chance of promotion within a traditional career, employees have little direct control, since advancement often falls within the context of a rigid structure of merit increases, budgets, and office politics.”
Are you better at strategy or execution?
John Williams, a corporate consultant, best-selling author of F**k Work Let’s Play and founder of The Ideas Lab, is now offering tips on how freelancers or contractors can transform into highly paid consultants. His webinars, which he promotes via LinkedIn, explain the different skills and demands required of consultants, mainly because you will be consulting on strategy implementation with someone else inside a client’s organisation or a contractor doing the “graft work”. There is value in each, but as a consultant you can often charge a higher day rate and focus on what you do best: strategy.
But what if you enjoy offering both strategy and execution? Then you will need to ensure your rate encompasses both skill sets and your most valuable asset, your time.
Consultants are the big problem-solvers that dig deep into a company’s operations and then report on a cost-effective plan to implement change to improve all or just select departments or processes of the business. They may interview staff and create action plans. A consultant will often have to understand the company dynamics and politics without actually getting entangled in them.
Contractors on the other hand are often called in to complete a certain project. Increasingly they are working via a recruitment agency and are paid through a payroll or umbrella company. They will work for a pre-determined price, meaning that the contract ends when the task is done.
Note that while contractors must have suitable technical skills to complete their jobs, their work only requires a narrow understanding of an industry as a whole. For example, a business might contract a copywriter to write emails for a marketing campaign, according to freelance platform Upwork.
Upwork has published a comparative analysis of the two roles here.
Are you considering making the move to consulting? What questions do you have? Include them in the comments and we will endeavour to have them answered by experts or fellow consultants happy to share their experiences and knowledge.
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