In this guide, you will get my opinions on how the contracting market is looking within the UK. Due to the aftermath of the IR35 changes made by HMRC in 2021, the contracting market had a very tumultuous period that has impacted thousands of people.

This guide has been written to make fellow contractors feel slightly better about themselves and to lament over the good 'ole days. This article is going to bitch and moan about IR35, so if that's the type of article you are looking for, read on 🔥🔥🔥

What Is IR35?

IR35 was a tax law introduced by HMRC in 2021 that changed the relationship between contractors and employers. HMRC's aim with IR35 was to prevent workers who they considered full-time employees from getting a free tax ride.

In essence, if you used a contract full-time at a company, HMRC wanted you to pay the same amount as tax as an employee. This change in how tax is assessed has made life a lot more complex, more expensive and less profitable for companies, contractors and full-time staff.

When a company decides if they need to hire an employee or a contractor there is usually one main determining factor, duration. For companies that have temporary projects to deal with, hiring full-time staff for short-term needs does not make sense. This is where the usefulness of a contractor comes into play.

When companies need to boost headcount for short periods, hiring a contractor makes the most financial sense for both parties. I have worked for companies that have hired full-time staff for short-term project work and then made mass redundancies when the project finished. I know from first-hand experience when companies follow this strategy it kills team morale and increases the odds of your top talent jumping ship quicker! Ethically this appraoch is also questionable.

For companies that have to deal with project work, hiring contractors makes a lot of sense, however, for the contractor there needs to be a carrot. Why would a highly skilled worker, pick a more risky short-term contract over a safer full-time position. Easy answer, money💰💰💰

This contractor risk/reward is where IR35 is causing havoc. HMRC wants contractors to pay more tax on their income. When announced, this obviously went down like a lead balloon. Remember in 2021 when we had a fuel shortage? The issue was not due to a lack of fuel, the issue was due to the truck drivers who used to be outside IR35 contractors suddenly faced paying more tax so they went elsewhere (more here)

IR35 affected every company within every industry within the UK. IR35 puts more responsibility onto companies. Companies now have to legally carry out an assessment of the contractor’s tax status.

If a role is deemed inside of IR35, the company will have to ensure the national insurance tax for that contractor is paid to HMRC. IR35 for companies means a lot more admin and wage work, which costs money to carry out.

In terms of the contractor, IR35 means paying a lot more tax. Obviously, no one wants to pay more tax, especially high earners who pay enough already. In the short-term at least, IR35 means many contractors will be paid less and their take-home will decrease.

At a certain risk/reward threshold, the benefits of contracting over permanent employeement make less sense. Why take a contract gig for 6 months when you can get paid the same in a perm job with better benefits?

Many surveys have been carried out on the impact of IR35. None of the results from any of these surveys has shown any positive benefits for the company or contractor. One survey showed that 61% of surveyed contractors have taken a permanent job (here). This [study]) found 426 respondents surveyed said they had moved to permanent work due to IR35 with over 41% saying they were out of work for six months or more following the roll-out of IR35.

I used to work in a role where I had to talk to a lot of recruiters. The general consensus was that contracting was pretty slow in 2021 when the pandemic was raging. Towards the end of 2021 things started to pick up again, however, contracting rates had not risen enough for most contractors to make the risk/reward proposition for contracting compelling enough.

Companies do not want to have to pay the contractors national insurance tax by upping their day rates to make that risk/reward margin more compelling. With the state of the world in less than ideal circumstances, business is hard enough for a lot of companies without having to increase contractor wages by 20%-30%.

Contracting day rates are based on supply and demand. Even though IR35 has made contracting more difficult, there is another factor that is affecting the market that is also meaning the news on contracting is not all doom and gloom.

The 2nd Wave Of The Great Resignation

CNN news reported recently that there is a second wave of the great resignation. Many permanent employees are unhappy and are swapping jobs at an alarmingly fast rate. From first-hand experience, I have seen this statement to be true.

I'm currently working in a sales role. As part of my role, I need to talk to a number of different enterprise-level (500+) companies on a weekly basis. A significant number of my deals have stalled this year because key people in the clients' teams have quit during the sales process.

According to the CNN article, the reason for the 2nd wave is that people who resettled during COVID are having buyer's remorse. The grass for permanent employees is not always greener and people seem to be just as unhappy in their new jobs as they were in their previous positions.

The reason why the great resignation affects contractors is opportunity. With a more disposable job market, the need for contractors with also increased.

As you can see from this article (How COVID affect jobs), the job market has been unpredictable for the last few years. As people quit, companies have to hire contractors to plug the gaps, it's the nature of the beast.

This statement can be proved by looking at several leading job sites like IT job watch. You can see the trend that there has been an increase in the number of marketed contracting jobs in the last few months.

How To Thrive in 2022

Let us close this guide off, considering how this news impacts you. Regardless of perm or contract, to thrive in any market, you should spend time and learn new marketable skills. The people who keep their skills sharp, and constantly learn are the people who find work.

If you want to go back to contracting, start contracting or even get promoted internally now is a good time to think about it compared to last year. Contracting life is still not as profitable as before 2020, but it is more positive.

If you read the news about the likely upcoming recession, you may want to stay perm until things get more sunnier. It is likely that in 2022 and maybe early 2023 companies will need to tighten their financial belts. When this happens contractors are always the first to go.

For old hand contractors, this is your chance to try new roles and learn new skills. There are perm roles that you could never win as a contractor. Since moving perm I've worked in a sales role and a head of the development role. Both roles had interesting aspects and both were things that I could never have tried if I stayed contracting. In life, you need to make the most out of a bad situation.

As a final note, if you are closing a company, make sure you have enough money to close it and pay your tax. Over the last year, I've been stung with some pretty harsh tax bills. Some of the bills were a surprise which dented my bank balance a lot. I needed at least 35k to close my company down so make sure you have a large buffer for these unexpected costs.

Happy Coding 🤘