What I learnt from 7 months as a Data Engineering contractor?
By: Dominic Murray
Tags: Contractors, Data Engineering, Data Engineer, Software Engineering, Software Development

Moving into contracting is an option for many people working in tech. It’s pretty appealing at first glance mainly due to the high day rates associated with these roles. I know as a junior engineer, the day rates being offered seemed crazy to me. Now having been around for a bit longer and having worked as a contractor myself, I’m going to dig into the in’s and out’s of contracting and whether it could be a good option for you.

What is contracting?

I’m presuming if you’re reading this you already have an idea, but let’s cover it briefly. A contractor is a self-employed worker offering specific technical skills generally on a short (or flexible) term / project basis. In my experience, contractors typically work as individual contributors working in teams of mostly permanent employees. Many businesses take on contractors when they need someone with a specific skill set to complete a project or just to increase their available resources without the commitment of a permanent contract.

Why would you want to start contracting?

As I alluded to earlier the salary is one benefit, but there’s a few other reasons you might want to consider contracting. Contracting offers you a lot of flexibility. Don’t like something about your current work? As a contractor you’ll generally have a very short notice period, if you’re not enjoying your work you can easily move on. Since it’s not a long term commitment, interview processes for contracting roles are typically shorter than their permanent counterparts. You can easily find a new contractor role within a couple of weeks, unlike permanent role where it can easily take months.

Another reason to consider becoming a contractor is the nature of the work. You’ve of course always got to choose your roles wisely, but as a contractor you’ll generally have a specific goal and be allowed to focus on that goal without many of the distractions a permanent employee would have. As an engineer this can be quite refreshing. Coming from permanent roles where I was always being pulled away from my work to attend company meetings or support another team, I relished the opportunity to be able to focus predominantly on one project.

Why contracting might not be for you.

The upsides of contracting can also be the downsides. The downside of having more flexibility is having less job security. This is partly why contractor roles are better paid, the day rate takes into account the added risk that an employer will end your contract at short notice. Some people find this idea very uncomfortable, but in my experience a Data Engineers skill set is highly valued and you’re far more likely to have a contract which is continually extended rather than cut short.

The other main downside is, as a contractor you might feel like an outsider. You likely won’t be attending key strategic meetings or generally be involved with the long term planning process. If this is something you thrive on, then contracting probably isn’t for you. In my experience this exclusion didn’t extend to technical decisions, where as a contractor, my opinion was often highly valued.

How do I get into contracting?

Coming from a permanent position, contracting can seem intimidating, and no doubt it is more complicated in terms of set-up and maintenance. I’m not going to dig into the in’s and out’s of setting up your business hear, but the best advice I can give is find a good accountant. The accountant I used walked me through the entire set-up process. They were perhaps a more premium service, but to me it was totally worth it to have someone available to answer the many questions you have when setting up your first business.

How much do contractors make?

Let’s talk money. Contractors salaries are typically defined as day rates, that is the amount you make for 1 days worth of work. Your day rate strongly depends on your experience. But to give you an idea a mid-level Data Engineering contractor can expect to earn between £450 and £650 per day. If you’re more senior this rate can of course be considerably higher. As a permanent employee these rates might seem crazy to you, but this isn’t directly comparable to a permanent employees salary, let’s dig into the details.

As with a permanent employee your advertised salary isn’t the amount you take home, but for contractors the taxes are a little different. The first tax you need to be aware of is corporation tax. That is the tax your business pays on any money you make. For the tax year starting April 1st 2020, UK corporation tax is 18%. Now that’s the tax your business pays, you will also need to pay your own personal tax on everything you withdraw from your business bank account. Generally the most tax efficient way to do this is with dividends. Through dividends you get £2,000 tax free, you pay 7.5% on everything less than £50,000 and 32.5% on everything over this. The jump from 7.5% to 32.5% is a pretty steep one, as a result many contractors choose to stay under the £50,000 mark and leave any additional profit in the business. This still gives you £46,400 after personal tax is deducted to live on, or £3,860 per month.

But what about the rest of the money remaining in the business? Even on a day rate of £450, after maxing out your 7.5% allowance you would have 10’s of thousands remaining in your business account (provided you worked a full year). Well this can offer you some security. If you’re ever out of work having some money in your business will allow you to continue to take a salary while you seek out new employment. If you save up a lot of money in your business you can even take an extended break, I’ve met contractors who take 6 or even 12 month breaks, while continuing to pay themselves full salary!

Another benefit of being a business owner is business expenses. It’s not quite as good as business expenses in a permanent role as of course it’s your business so you’re still paying, but it does have some advantages. The main one being that business expenses are pre-tax. That is, they’re withdrawn from your total earnings before any tax is taken. This makes a big a difference to their real cost to you. The main way you’ll benefit from this as an IT contractor is likely travel costs and lunches. If you work in a big city like London travel and lunch costs can really add up, saving tax on all these purchases can easily save you hundreds (if not more!) a year.

Why I stopped contracting.

Contracting may seem like a bit of a loophole in the system, you’re sitting next to permanent employees, working a similar role, but getting paid more and paying less tax. In many ways this type of contracting is a loophole, and not the way the government intended it to be. The UK government introduced legislation known as IR35 which aims to clearly define the relationship between client and contractor. It requires certain things be possible, such as substitution of personnel, since the relationship is technically between company and client, the company should be able to substitute personnel as it sees fit. Ideally contracts should also be on a project basis, essentially the contracted company is there to complete a specific job and no further work is guaranteed. It also follows on that, it is the freedom of the contracted company to complete the job as they see fit, that is a client cannot specify their working hours or place of work.

If you have any experience with contractors you’ll know the above is not generally accurate. Contractors often work alongside permanent employees, are expected to work the same hours and while their role may be a bit more focused they’re generally not restricted to work on only one project. The reason for this is that IR35 has been enforced poorly. It’s been the responsibility of the contractor to decide whether or not they violate IR35. With so many contractors across the industry and the detailed investigation which would be required to investigate each case, it is clear why this has been enforced badly.

Now all this is changing. From April 2021 it will be the clients responsibility to decided whether the relationship between them and their contractors breaches IR35. This is a significant change. No longer will HMRC need to evaluate specific contractors, they can instead go after large organisations, and believe me they will be looking to make examples of some of the big players early on.

So why did I stop contracting? Well the change to IR35 is a big reason. It’s not that IR35 prevents you from contracting, but with companies now being held accountable the relationship between contractor and client will change significantly. That means no attending team meetings, no team socials and quite possibly not even sitting with your team. If you’re working solo, this is a pretty alienating prospect.

For me the increased uncertainty around IR35 was enough to consider taking a permanent role elsewhere. In the end the permanent role I was offered was a great one at really good company. I take home less than I did, but actually with benefits and equity it’s not too far off.

Post April 2021, contracting will still continue, contracts will look slightly different, but I have no doubt the industry will adapt just as it did back in 2000 when IR35 was first introduced.

If contracting is something you’ve thought about I would highly recommend giving it a try. There’s definitely some money to be made, so even if you find it’s not for you, it will be a profitable experiment ;).