Not all Contractors want to buy a brand new Mercedes

It will be 3 years to the day on the 13th February 2017, that I went solo and chose to work as a contract / freelance developer. I don’t earn mega bucks & I haven’t paid a visit to the sales desk in my local Mercedes showroom.

Contractors and how much they earn feels like they’ve been taking a political battering recently and it really stresses me out to be tarnished with a rough, colourful ‘you make more money, so you should pay more in tax’ brush. I’ve been on the receiving end of this conversation a few times recently and it really upset me.

Not all of us are money-greedy “tax avoiders” — thanks George Osborne for that! I would like to ask from those who are quick to pass judgement — to perhaps hear some of my reasons in hope to highlight that choosing to work as a contractor isn’t solely about earning a shit load of money to then go skipping off to buy something shiny and expensive just to pay less or little tax.

So let me explain..

Access to continuous learning from working with different tech by experiencing different workflow: I want to learn more & progress by using all sorts of preprocessors, front-end frameworks & js frameworks. I want to work in environments which improve build process and multi-developer workflow. It’s all too common for agencies to adopt a single approach that works for them and stay using that tech. It seems rare to find an agency or company which look to continually change process with the arrival of new tech. I’ve learnt more & produced more whilst working self-employed than I did in 3 years at one agency. This is a huge incentive.

Remove prejudice from my CV: by providing a service via an Ltd I can work at different places in any one 12 months, allowing to build upon my first point, without prejudice on my cv.

A real healthy work-life balance: I won’t be working 46/47 weeks a year. It can take anywhere between 1–2 months, possibly 3, to secure a new contract or to find freelance work from several sources. This means in my down-time I can focus on other things in life. I don’t have children, but for contractors that do — this incentive is invaluable! No full-time job that earns the amount of money that you need will give you this.

Less stress: oddly those poor employed developers that just want a stress free job, where they simply turn up to work, do their job and then go home — even the ones that work more hours than they should. Can still get a bad reputation for not being ‘engaged’ with company ‘values’. WTF. I don’t honestly believe that to be a good employee you have to be entangled in company politics or buy into company values. So why force some square people into a round job hole — then blame them for not fitting? Anyway, self-employment let’s me get on with my job and invoice for it. I am not employee, you buy my services — simple.

No risk of being made redundant without warning or foresight: I control where I work and partly for how long. I’m not entangled in an intricate web of hierarchy or company politics. I don’t carry that horrendous feeling when companies look to make redundancies, sorry, ‘restructure’.

More control over what I work on: I made a promise to myself when I started to look for my first contract — to remain picky about where and what I work on. There is only myself responsible for my cv whilst I’m no longer resourced on projects from an employer. So I want it to be as good as it possibly can be and contain interesting or different work.

To summarise my reasons — I get to work with the latest tech by frequently moving around, no prejudice on my cv, I’m healthier & happier, have more time to do stuff, I’m less stressed when actually doing my job, I get to shape my cv of how I want it to look and finally I better control my own working life. That’s why I do it. It’s autonomous & I love it.

Parallel to the emotional side, the monetary side isn’t as clear cut as not paying the same amount of tax as the employed do.

In a way I’m politically forced to work via a Ltd route if I want to work for big brands or companies of a certain size.

Companies don’t want to pay tax on me being there if I’m not employee — which makes perfect sense. So the way they do it is purchase services from other companies with a start & end date — contractors!

Whilst there is only myself with no plans to expand into an agency model, this means I earn less than you might actually think. I pay corporation tax, tax on VAT (not all contractors will be VAT registered) and tax on Dividends. Add another tax in the form of income tax should I choose to pay myself a ‘normal’ salary (in the event of applying for a mortgage etc). A director salary is £8060 pa tax free, whereas an employee can earn £11,000 tax free.

Dividends - we have different tax bands. Theres a £5000 tax free limit then it’s 7.5% and over £32,000 you pay 32.5% tax.

Effectively taxed 4 times, whilst I own the Ltd, you actually earn (get to keep and spend) roughly around 2/3rd of an invoice.

What about Benefit in Kind? BIK is sort of useless when operating in this manner for some things. For example I recently looked into purchasing a gym membership via my Ltd as a BIK. It works out like this:

Annual membership cost: £750

Company buys it, it pays a 13.8% tax on it (£103.50)

The company does get to offset this as a corporation tax saving (£46.50)

So tax - saving (£57)

When I do my self assessment I then pay income tax, as it’s seen that the £750 the company uses to pay for it is income to me personally (£150)

So a £750 gym membership now costs £957. An additional £207 for the privilege of purchasing via BIK. Obviously, if I didn’t own the Ltd I would be be paying £150 for a £750 gym membership — now that’s a benefit! Sadly, because I do own the Ltd it just costs more. Therefore I will pay myself a dividend and personally buy it instead, incurring 7.5% tax on the £750 (£56.25) — well provided I haven’t gone over into the £32k+ dividend tax band. Making the total cost of the gym membership for me £806.25.

Still think we don’t pay enough tax? Also keep in mind that contractors may only secure 2 contracts in any one 12 month period. Without choice we may not work for 2–3 months of a year. And with tighter IR35 rules on the horizon affecting working for a public sector company — we could be looking to pay even more tax! A list obtained under a FOA from the government to identify a list of public sector companies are (though may not be limited to):

  • Government departments, legislative bodies, armed forces
  • Local government
  • NHS
  • Schools and further and higher education institutions
  • Police
  • Other public bodies (including The British Museum, BBC, Channel 4, et al)
  • Publically owned companies (wholly owned by the Crown and/or the wider public sector such as Transport for London)

Urgh…!

And you know what; if some contractors do want to work their guts off to earn the higher rates and then find themselves with an opportunity to buy that brand new Mercedes from a glossy features price list… then fair play to them! This shouldn’t put them in the firing line for prejudice or to be branded “tax avoiders”.

I’d love to hear from other contractors on this topic. I’m passionate about what I do as a profession; but if increasing tax on contractors continues, then I’m concerned I might have to consider going back into employment. Where I feel I’ll risk losing interest in my skills from doing the same thing over & over & over again…

Technology Consultant. Writes insights on emerging technology, their applied use and political impact. Focus: RPA, AI, Media Manipulation, Voice Discovery