Why Should Contractors Pay Less Tax Than Permanent Employee on Same Money?

Contractors Pay Less Tax
Contractors Pay Less Tax

Contractors Pay Less Tax

So, should contractors pay less tax than a permanent employee on the same money?

Or is this unfair and should be fixed?

In his Spring Budget, Chancellor Hammond asked why a contractor making £100,000 a year should pay less tax and national insurance than a permanent employee on £100,000 a year.

I’ll bet most permanent employees, who still make up 85% of the workforce would agree with his premise.

He said that it is not fair that contractors should pay less.

“After all” he said “they use the same facilities”.

Chancellor Cut Dividend Allowance

He then went on to cut contractors dividend allowance from £5,000 to £2,000 a year.

He also tried to raise the national insurance that contractors have to pay from 11% to 13%.

When it was pointed out to him that this breached a promise not to raise national insurance in the Conservative Manifesto, his own backbenchers forced him to backtrack.

However, this gives us a clue as to what he, and Prime Minister Theresa May, believe about contractors.

Expect them to come back at contractors in other ways that are not precluded by the manifesto.

Matthew Taylor Report on Self Employed

Indeed, we can expect to see a major attack on contractors when the Matthew Taylor Report comes out in June. This was commissioned by Theresa May.

Indeed, the rise in national insurance for contractors was the first instalment of this.

Commentators expect that this will make the definition of self employment far more strict.

They expect it to preclude contractors who are doing the jobs that permanent people either previously did, or would do.

That would preclude developers and analysts on IT projects.

Contractors pay less tax than employees, as he sees it, and he wants to fix that.

Prime Minister and Chancellor’s Beliefs about Contractors

Anyway, at this stage just let’s look at the Prime Minister’s and Chancellor’s principle here.

That’s because it informs all the attacks they are making, and will make, on contractors and their income.

That is that a contractor and a permanent person on £100,000 a year should pay the same tax and national insurance.

They say that contractors pay less tax than employees and that is not fair.

The first thing I would say is that a permanent person on £100,000 a year is not earning £100,000 a year.

That is just the cash part of it.

Non-Cash Payments to Permanent Employees

To that must be added:-

  1. Employers National Insurance Contributions
  2. Pension
  3. Holidays
  4. Bank holiday pay
  5. Sick Pay
  6. Maternity Pay
  7. Company car
  8. Subsidised perks like lunches, sports club etc.

If you took all those away and turned them into cash it would mean that they would be getting a considerable amount more than their £100,000 a year.

Permanent Employees Job Security

I would also argue that job security is an intangible which should be monetised and taken into consideration.

Probably the main reason that many permanent employees don’t become contractors is because they would lose the security of a permanent job.

They need this for their mortgages, for their partners and for their chidren.

They need to be earning to pay for all of those.

Unemployed IT Contractor Tales

To see what can happen if you don’t have that you should read the heart rending stories of what happens to contractors who don’t have this income security when a downturn comes.

Read about them in our IT Unemployed Tales section.

So, this is probably worth more to permanent employees than all the other perks or additions.

Yes, it is not monetised.

I think it should be. There should be some way of estimating what this is worth to permanent employees.

Contractors Earning £100,000 a Year

So, if a permanent employee’s income of £100,000 a year is not as it seems, what about a contractor?

Should he, or she, be taxed at the same rate as a permanent employee earning the same income?

Well, of course, a contractor doesn’t get a pension, holiday pay, sick pay, maternity pay, company car or perks like a permanent employee does.

However, as we have already added those on to the permanent employees £100,000 a year we won’t double count by taking them away from a contractor’s income.

Additional Expenses for Contractors

We will just look at additional expenses that contractors have that permanent employees don’t.

First of all, there is the employers national insurance that contractors have to pay and permanent employees don’t.

Then there is the expense of getting to a client’s site.

Travel and Subsistence Expenses

The Government has taken this away from umbrella company contractors and personal service company contractors who are inside IR35.

That’s because they see them as disguised employees.

One wonders why contractors are using umbrella companies if they are outside IR35. One also wonders why contractors are using personal service companies if they are inside IR35.

However, that is another matter.

As the SNP have pointed out, this is nonsense anyway.

Expenses Incurred by Oil Rig Worker

They point out the expenses incurred by an oil rig worker who is a few days on and a few days off, and has to go back and forward by plane, incurring the expense.

If he is a permanent employee then his firm would pay that expense. They would expense it against tax.

However, as a contractor he has to pay it himself – and can’t expense it against tax.

It would be the same if an umbrella company IT contractor is working in Germany, France, Holland or some other European country.

If a permanent person was sent there by their employer, they would pay for it and offset it against tax.

So, why should a contractor not, at least, be able to offset it against tax?

This is, basically, a tax on contractors only.

Travelling Long Distances to Work

Contractors are far more likely to have to travel long distances to work than a permanent employee.

Indeed, it is part of a permanent employee’s criteria that any job must be in an area that they can easily get to.

They may take a job that is far away – but that would be with the intention of moving there.

And usually the new employer will pay most of the relocation expenses – and offset it against tax.

They can do this because they are expecting to be there a long time.

However, as contractors don’t expect to at a client’s site for years this option is not open to them.

Contractor Staying Overnight

If the contract is a long way away they may have to stay there overnight.

However, if they are inside IR35, like most umbrella company contractors, they will not be able to offset that against tax.

Because working away from home, or their main office, is something that contractors are more likely to do than permanent employees, this is basically taxing contractors differently from permanent employees.

If an employer pays a permanent employee’s relocation expenses, which can be considerable, why cannot umbrella company contractors claim temporary relocation expenses against tax for the time they have had to live away from home with the extra cost of doing so?

Looking for New Contracts

There is also an expense in looking for new contracts. That can be in stationery, phone calls and internet usage, as well as the expense of getting to the interviews.

There’s also the time spent looking for work and travelling to interviews. If the contractor was to charge his limited company this at his, or her, normal rate, that would be considerable.

So, as contractors are far more likely to have to work away from home than permanent employees, and will have to pay for it themselves, even if it is tax deductible, this is an extra expense they have to pay that a permanent person wouldn’t.

I won’t take into account, here, the fact, that contractors seldom work a full year. This is taken into account in his, or her, taxable income.

Contractors Pay Less Tax than Employees

So, although the Chancellor, and Prime Minister, believe that a contractor making £100,000 a year should pay the same tax as a permanent employee making £100,000 a year, they are two different beasts entirely.

They are not comparable.

Or, at least, if they are comparable, all the above factors should be taken into account.

So, should contractors pay less tax than a permanent employee on the same money?

Even with the intangibles, like lack of job security, a contractor on £100,000 a year isn’t really on that at all.

Contractors pay less tax – but that’s only the headline figure.

Im reality it’s much less.

Also, a permanent employee on £100,000 is not really on that. It is really much more.

So, it is pretty silly to say that they should pay the same tax and national insurance.

However, unbelievably that is what the two most powerful people in the land believe.

Actions When it Comes to Contractors

Furthermore, it is this belief that informs their opinions about contractors and their actions when it comes to taxing them more.

If contractors are to stop Governments constantly attacking them they have to change this utterly wrong belief that they have.

Contractors pay less tax than permanent employees. That’s as it should be. You are comparing two different things which are not comparable.

Where are you IPSE?


Contractor Services

If you do need an umbrella company you could try one of the following:-

Simply Umbrella

Public Sector Umbrella Company

If you want to cut your Accountancy costs by using apps try Aardvark Accounting.

For Mortgages specially designed for contractors try Specialist Contractor Mortgages.




  1. One issue that doesn’t seem to come up in discussing this is that if a contractor is supplying a service for £100,000 a year to deliver a project that their client does not wish to increase permanent staffing levels to deliver, then if that client has equally skilled staff, then they are very likely to be on lower salaries of 60,000 to 70,000 – and somebody in the client’s permanent employment on £100,000 would be performing a higher-level job that a contractor would deliver as a project-based service for much more that £100,000, etc.

    Also from a tax revenue point of view, a permanent employee doesn’t generate VAT revenue on his salary, whereas a contractor’s contract of £100,000 generates £20,000 VAT (or £16,500 if on the newly altered Flat Rate VAT) for HMRC.


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