I recently met up with a leading Irish contracting services organisation in order to gain a deeper understanding of the business. I had noticed that many of my candidates seemed torn between becoming a PAYE worker or a limited contractor, and I wanted to be able to help them decide which path is best for their career. Many contractors in Ireland today will opt to go into a company as a PAYE employee contractor, but why?
In my experience, candidates choose the PAYE option due to a lack of understanding as to what is involved in becoming a limited contractor, and the benefits that can be reaped from making this move. Thus, many contractors will opt to play it safe and put it on the back burner for another while. If you can relate to this, then keep reading. In this blog, I will compare working as a limited contractor to working as a PAYE employee.
In order to understand which path is best for a particular worker, it is important to understand the implications of working as a limited contractor as opposed to a PAYE employee. One of the biggest appeals of limited contract work is the prospect of increased earning power. As a PAYE worker, you will pay higher taxes, and your employer will keep a portion of the value brought in by a contract. As a limited contractor, you will keep a larger portion of a contract’s value, and be entitled to increased tax relief.
While limited contractors get to keep a larger portion of the income brought in by a job, it is important to remember that larger companies have access to big clients, and will have a steady stream of work for their employees. Limited contractors are responsible for developing their own leads, and negotiating their pay. These factors alone can decide whether a person is better suited to working under an umbrella corporation or as an independent agent.
Another major draw to becoming a limited worker is the freedom that comes with it. While PAYE workers have little or no say in the jobs they do or the hours they work, limited contractors can choose when and where they work. This makes it a very appealing choice to many people, particularly those who need to build their work life around their home life.
Limited contractors move around far more than PAYE employees, which can be viewed as an advantage or a disadvantage, depending on the individual. Some of us may prefer working with the same people every day and establishing relationships. Others may prefer to work with multiple clients in a variety of working environments.
Risks associated with becoming a limited contractor
Sick benefit: Contractors can purchase a sick day benefit/day one protection policy which costs from about €30 a month and protects them in the event of sickness.
Getting a mortgage: People seem to have the impression that contract work will hinder their efforts to buy a home. This is incorrect. Many contractors have a higher income than their PAYE counterparts, and while some may be classified by the banks as high risk, there are schemes aimed specifically at helping contractors get reasonable mortgages.
Take-Home Pay: Limited contractors keep a larger portion of a contract’s value than PAYE employees. As a PAYE employee, you will take home about 60% of a contract’s value, after your employer has taken their share. As a limited contractor, you could take home up to 80% of the value. In addition to this, contractors are responsible for their own taxes and eligible for increased deductions & credits.
Security: Although becoming an independent contractor provides many benefits, such as increased rates and freedom, there are drawbacks to this. In Ireland, independent agents are not protected by many of the laws that protect PAYE employees, such as unfair dismissal laws. Contractors may also decide to pay only 4% PRSI instead of the typical 14.75%, which gives them greater financial control, but in exchange for sacrificing access to benefits such as the jobseekers allowance or illness benefit.
PAYE can often seem like the safer, more familiar option to many people looking to break into contract work, but as I have demonstrated here, there are major advantages to choosing the limited contractor path instead. While it may not be suited to everyone, limited contract work offers much more freedom and can greatly increase your potential income, so don’t let yourself get held back by what’s familiar. You could be missing out on the perfect opportunity to grow your career.