More of us are choosing to work as contractors than ever before. At the end of 2019, there were over 5 million self-employed people in the UK, compared to just over 3 million in 2000. And, in a recent survey, 91% of freelancers said that going solo had boosted their quality of life.
But what exactly is contract work? And what are the pros and cons of contracting versus permanent work? Let’s explore.
What is contract work?
Contract work, contracting or freelancing is work that a professional does for a client for a fixed period of time, typically for a few weeks or months. It's particularly common in fields like marketing, advertising and IT.
A contractor is usually paid by the hour or day and usually invoices their client for payment, rather than receiving a salary through company payroll.
Contractors can operate in various ways. For example, as a sole trader or through a limited company. However they trade, they are responsible for handling their own tax and national insurance contributions.
They tend to work on project-based or time-sensitive jobs, and are often brought in to contribute specialist skills or fill a temporary gap in a team. If the contractor works for an agency, they may work for one client or many clients at the same time.
What is permanent work?
Permanent work is employment that offers a fixed salary in exchange for a set number of hours per week.
The employer handles tax, benefits and national insurance contributions on behalf of the employee, and the employee receives their salary after Pay As You Earn (PAYE) tax has been deducted.
Permanent employees typically have job security; unless they leave, are made redundant or are terminated by their employer, they can remain in the job indefinitely.
Should I work as a contractor or permanent employee?
Wondering whether to work as a contractor or a permanent employee? Let’s go through some of the pros and cons.
Benefits of contract work
Freedom and flexibility
“Some of today's most skilled talent choose to work as a contractor because they enjoy the freedom, flexibility and control that working on well-defined projects provides,” says Future of Work expert Edie Goldberg.
Contractors typically earn a higher pay rate than employees. In some industries, it’s possible to charge hundreds of pounds per hour, or thousands per day.
If you operate as a sole trader, you will pay income tax at the same rate as a permanent employee. But if you work through a limited company or umbrella company, you pay tax at the slightly lower corporate tax rate.
“Working for one job for years on end can become tiring and eventually feel stagnant,” says financial writer Liam Hunt. “If you aren't regularly entrusted with new responsibilities and projects, your skillset can age and you'll be left in a more vulnerable position when you eventually leave your salaried position.”
Contractors typically work on a variety of projects throughout the year, for a range of clients and in a range of different settings. By contrast, many permanent employees might work on the same or similar projects for years. And because contractors control their own time, it’s easy to take some time out to learn something new and boost your skill set.
Working on a range of different projects often brings you more connections than operating in a single team or organisation.
“In a typical week, I connect with several prospective clients, pitch to one or two companies and network at a talk or conference. I meet three times as many people as I would if I were working in-house,” says compliance consultant Evie.
Set your own schedule
As a contractor, you can be your own boss. You not only decide which clients to work for, but when you want to work them. You might decide to work during the school term only, take all of August off, or shift your working hours to suit your lifestyle or health needs.
“Employees don't want to be boxed into a role that prohibits them from contributing to the company in different ways,” says Edie. “They want to be continuously learning and growing.”
Working on defined projects can help contractors stay in the ‘stretch’ zone, supercharging their learning through varied challenges.
Fewer office politics
As a temporary team member it may be possible to avoid organisational politics (or at least, to not stay in one team long enough to become embroiled in them).
Disadvantages of being a contractor
Lack of benefits
For a permanent employee, going on holiday or falling ill doesn’t usually affect the salary you take home each month. For contractors, you need to create your own safety net. To do this, it’s wise to build benefits like sick pay, parental leave and pension contributions into your profit margins.
You may be pitching for clients constantly, or you might stay with one client for months or even years at a time. Either way, there’s no guarantee that you will win the business you want, or that a current client will extend your contract. If a major project is no longer wanted or needed, or your niche skill set falls out of favour, you could be out of work.
As a permanent employee, you may get a personal development budget or have the chance to attend training sessions paid for by your employer. As a contractor, you must be prepared to invest in your own learning, as temporary employers are highly unlikely to foot the bill.
Contractors are responsible for their own taxes, insurance, personal development and project management. While you may outsource tasks such as managing your diary, marketing your services, chasing unpaid invoices and filing tax returns, you may still need to allocate considerable time to admin.
You’ll also need to make sure that your employment stays on the right side of IR35, legislation that stops companies from using contractors as ‘disguised employees.’ Read our guide to IR35 to learn more.
Pros of being a permanent employee
As a permanent employee, you’ll receive the same salary each month. Whether you’re hyper-productive or having an off week, it’s not likely to affect your finances.
If you want to know exactly where you’ll be working in three months, six months or a year, contracting may not be for you.
Access to credit
Depending on your financial situation, permanent employees are more likely to secure credit or a mortgage than contractors as they have proof of a regular and stable income.
Defined career path
Many companies invest huge time and resources in developing their staff to reach the next level. With support from a dedicated team, you can plot a linear path from your current job to the next promotion, and beyond.
Contractors’ career paths tend to be less formalised. You may find yourself working very different roles from project to project, and you might struggle to find a job title that reflects the nature of your work.
As a permanent employee you will have access to benefits like an employer pension contribution, annual leave and paid sick leave. You can also take advantage of salary sacrifice contributions directly into your pension, which self-employed have to do manually.
Whether you have a generous personal development budget, or some informal opportunities to learn from your colleagues, your employer is likely to want to invest in your knowledge, skills and career progression.
“You don’t have to adjust to new conditions all the time,” says David Sharkovsky of Financer.com. “It might be challenging for some people, adjusting to new conditions and a new team. But if you find a good job with a nice team then you don’t have to worry anymore."
Cons of being a permanent employee
The typical salary for a permanent employee is lower than that of a contractor. That said, you’ll need to factor in the cost of holiday, sick leave, pension contributions, for either doing or outsourcing your own admin tasks, and a buffer in case you go long periods without work.
Permanent roles usually have fixed hours and less flexibility, although more and more companies are starting to embrace flexible or hybrid working.
You could find yourself working on similar tasks, with similar people, in a similar setting for years at a time. You can, of course, deepen your knowledge and expand your abilities as a permanent employee, but you may need to be more proactive about personal development.
Will more of us become contractors?
More and more of us are moving away from traditional, 9-5 permanent employment, whether that means firing up a side hustle, or using redundancy as a springboard to start our own business.
The nature of work is changing, too. “The line between contractors and employees is getting thinner and thinner every day,” says Edie. “I think the future of work will be more project-based. The differences between external contractors and the experience of working internally will become more similar, although not the same.”