With 2022 now in full swing, a number of companies are either in the process of or have fully completed their FY22 budgets. Either needing to know or knowing how much you have to spend on necessary projects to achieve company goals, many look to bring in a contractor or specialist to assist. Since the implementation of IR35 processes, the cost of an interim/flexible workforce has increased due to many roles now falling in the scope of IR35.
As a specialist in the interim market, I can say from experience that historically contractors have been used for projects and cover of an undefined length whereas fixed-term contracts have been used for exactly what they specify, a contract of a fixed length such as a maternity cover or secondment.
However, with many companies looking to reduce their spend, is it more cost effective to engage a candidate on a fixed term contract rather than as a contractor?
To weigh up all the pros and cons, first and foremost you need to understand how the contractor market works. There are 3 different pay methods for contractors; PAYE, through an Umbrella company and through their own Limited company. The most financially beneficial to the candidate is being paid through their own Limited company where they can be paid a higher rate as a business and once deductions have been made, they earn more than through the other 2 methods. This also benefits the employment agency as payroll costs such as NI and pension are avoided. As such, this could mean that for a £500 per day charge rate, the candidate could earn up to as much as £470 per day with the remainder covering the employment agency operating costs and profit.
However, with the IR35 legislation cracking down on what’s known as a “disguised employee”, many companies have eliminated this payment method with a blanket in scope deduction for interim staff. This has led to contractors switching payment methods. Umbrella companies are 3rd party payroll providers that can offer additional benefits to contractors regarding their business expenses and travel. The employment agency would still regard this as a B2B transaction and so removes the above-mentioned payroll costs. However, the candidate then needs to cover their own payroll costs, the cost of using the Umbrella agency, and tax. Although not as beneficial for the contractor as an Ltd company, it can still be more cost-effective. With the effect COVID 19 has had on the economy, these benefits have been reduced with fewer business expenses and travel occurring. This had led to a number of contractors being engaged via PAYE through their recruiter.
To show the full extent of the financial impact on contractors, I’ve given a worked example below. For consistency, I’ll stick with the £500 per day charge rate and the same £30 margin mentioned above;
Pay Rate - £357.53
Holiday Pay (12.07%) - £43.15
NI (13.8%) - £55.29
Pension (3%) - £12.02
Apprenticeship Levy (0.5%) - £2.00
Agency Costs/Margin - £30.00
Total - £500
As you can see, even if holiday pay was incorporated into their full rate, the candidate is taking home almost £70 per day less. This, subsequently, has seen charge rates rise.
This has led companies and talent acquisition teams to recruit short-term hires via fixed-term contracts as it’s more cost-effective. Contractor pay rates tend to be higher to counteract the uncertainty of work. The above rate calculation is a recent interim I’ve recruited into a £70k role. The client pays for the flexibility and the higher rate to the candidate and for the worker not to be on their headcount. If you were charged 20% on the pro rata’d salary for 6 months, it’s much more cost-effective. However, this is just not appealing to candidates as the regular job search plus the potential to be unemployed for months at the end of the contract has pushed up FTC salaries. In an increasingly competitive, talent short market, retention bonuses and a return to out-of-scope determinations have become the norm.
FTC’s are, as a general rule of thumb, more cost-effective. You will, however, struggle significantly more to get the right caliber of candidates within your budget. At Savant, we provide both options and will provide expert advice for your specific needs. We pride ourselves on providing the best, most informed onboarding process from start to finish to build long-term, working relationships rather than contingency recruitment for 1 off roles. For a free, confidential discussion about your interim hiring strategy for the coming year, please give me a call on 07773 643 082 and we can arrange a face-to-face or video meeting.FTC vs Temp.
