Hiring A Contractor? When to Employ a Contractor on the Company Payroll

Posted by Ravi Agrawal in 22-Sep-2017 15:13:39

Hiring A Contractor? When to Employ a Contractor on the Company Payroll

Are you paying a substantial amount of money to a contractor that is doing a great job and contemplating employing them? Or are you concerned that they could be potentially caught by the IR35 rules and you don’t want to lose them? To understand when you should employ a contractor onto the company payroll, you first need to be aware of the advantages and disadvantages of bringing them on as a full-time employee. 

hiring a contractor

 

There are no tax benefits to employing a contractor full time. However, there may be some cost benefits to the company.

 

It is well-known that contractors charge a lot per hour, so if the company has enough work to utilise a full-time employee, their salary should in theory be less than the day rate the company currently pays the contractor, due in part to the numerous perks of employment. Employees are entitled to sick leave, holidays and company pension contributions, as well as benefiting from higher job security, a steady guaranteed income and no administration work such as keeping receipts, accounting for expenses and filing a tax return.

 

But how does a company gauge how much they should offer a contractor to ensure they switch to being a full-time employee?

 

Let’s look at an example:

 

  • A company currently pays a contractor £280 a day.
  • Annualised this would be £72,800 as there are 260 working days in the year.
  • However, we should take out their entitled leave - bank holidays (8), sick days (5), holiday leave (20), amounting to 33 days.
  • Hence, their salary for their paid working days would be £63,560.
  • Then you have to account for the Employers NIC that you would pay and potentially any pension contributions which would be an additional expense to the company.
  • At 1% their pension would be £52 per month, £624 per year.
  • At an effective rate of 12%, the employers NIC would be £7627 per year
  • Hence the total cost to the company would be £71,811.20

This is not far off how much the cost would be if the company paid for a contractor every working day (which is unlikely). 

 

These additional company costs need to be taken into account when figuring out how much salary you would like to offer the employee. Taking off any holidays and 12% for the NIC payment would provide you with a rough guide on how much salary to offer. In this example, around £55,000 would be a bench mark base salary and you would then need to take into account the employer NICs and pension contributions due on the £55,000 to work out the cost to the company.

 

The above example is just a rough guide on how much we feel you should be paying so that you are not paying above the odds from a cost saving perspective. Everyone’s salary is ambiguous and is based upon their demand and worth to the company. So, if you feel this contractor will generate you more income as an employee, then you may feel it right to provide them with a full 260-day rate salary. It is entirely up to you as an employer how much you pay your employees.

 

However, with the above in mind, unless your contractor is willing to take a pay cut and you have enough work to utilise them for the whole year, it is likely that the company would not benefit financially from hiring a contractor and employing them on the company payroll. 

 

Read How Limited Companies Can Save Tax Through the Employment Allowance to find out if your company can take advantage and save tax.

 

 Are you thinking of starting a business or changing the legal entity of your business? The form of legal entity you choose can have a significant impact on the way you are protected under the law and the way you are affected by taxation rules and regulations.  Join our free webinar on the 5th of October, 2017 - 11am-12pm to learn how to structure your business to success.

 

Register for Structure Your Business to Success webinar

 


 Thank you for reading! Please leave any feedback and comments below. 

Tags: Growth Best Practices, Contractors

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