Thinking about going into contracting

[JS1902]

But I have no clue where to start or what IR35 even is!

Bit of background - I'm 30, in a comfortable job working as a mechanical project engineer for the same aerospace firm since finishing uni. Current salary ~£34k and due to increase to ~£38k shortly taking into account a small promotion and annual pay rise. Working hours are 37/wk with a good deal of flexibility and hybrid working. Commute is max 30 mins each way, nice new building, good people and I like the project I am currently on. I have a bachelors in mech eng with 1st class.

The issue is that I feel as if I should be on a higher salary. Pay progression at the company is poor and with the ever increasing cost of living and with me wanting to buy my first property in the next few years I think a year or two of contracting would give me enough to save up a sizeable deposit (I don't want a huge mortgage).

In terms of skills I'd say I'm more of an all rounder and getting things moving type as opposed to being manufacturing or CAD focused. Does that put me at a disadvantage?

I'd appreciate if someone could summarise the key points of contracting and explain the relevant lingo.

[Driveeasy]

I contracted in an IT role several years ago, the money was great. No pension, no holiday pay, no sick pay and after 3 years I took one holiday with the family for a week and they called me on day 2 and ended my contract.

Was it worth it? Still took home 50k a year after a lot of deductions. Employers and employees contributions etc…

I do something completely different now and would consider going back to it but would probably need to update a qualification.

[Gad-Westy]

JS1902 said:

But I have no clue where to start or what IR35 even is!

Bit of background - I'm 30, in a comfortable job working as a mechanical project engineer for the same aerospace firm since finishing uni. Current salary ~£34k and due to increase to ~£38k shortly taking into account a small promotion and annual pay rise. Working hours are 37/wk with a good deal of flexibility and hybrid working. Commute is max 30 mins each way, nice new building, good people and I like the project I am currently on. I have a bachelors in mech eng with 1st class.

The issue is that I feel as if I should be on a higher salary. Pay progression at the company is poor and with the ever increasing cost of living and with me wanting to buy my first property in the next few years I think a year or two of contracting would give me enough to save up a sizeable deposit (I don't want a huge mortgage).

In terms of skills I'd say I'm more of an all rounder and getting things moving type as opposed to being manufacturing or CAD focused. Does that put me at a disadvantage?

I'd appreciate if someone could summarise the key points of contracting and explain the relevant lingo.

I'm contracting in mechanical design so hopefully can answer some of this.

IR35 is quite a big topic so it is worth trying to read around the subject a bit but to summarise in really simple terms:

Insider IR35 is a term HMRC use to describe an engagement where the contractor is working in a manner more akin to being an employee than an external resource. In an Inside IR35 contract you would pay tax as PAYE like any other employee. This would either be done directly by your client or via an Umbrella company.

Outside IR35 describes an engagement where you're working more like an external resource. You would normally have your client pay to your limited company and then pay yourself in a basic salary and dividends. The advantage here is normally that you pay less overall tax and can offset many of your expenses against your tax bill.

In the past, it was up to the contractor to determine whether an engagement was inside or outside and then pay tax accordingly. HMRC could challenge this and ultimately take contractors to court. Now, for medium to large clients, the client themselves must make that determination and carry the risk. For smaller clients, it's business as usual and you make your own determination.

The biggest sticking point here is that exactly what defines an inside or outside role is somewhat subjective and HMRC, Agents, clients, contractors and courts all have a slightly different opinion. Honestly it's a bit of a mess at present, but mostly you can ignore it as it's up to the client to define up front.

This is a good tool to give you a feel for your take home pay for any given contract.

https://www.contractorcalculator.co.uk/ir35calcula...

In terms of take home pay I would expect that you could expect to take home about 1.5x equivalent permanent role pay on a 'poor' inside IR35 role and maybe up to as much as 4x for a well paid outside role. There is a lot of variation here and sometimes you can end up on an hourly rate and long hours that sees your income rocket, other times, no work at all and £0 income.

Remember that you will be responsible for your own pension contributions and not typically get any sick or holiday pay. You could also have periods of no work although, personally I've only had a couple of months with no work in the last 4 years.

It suits lots of people but not everyone. You kiss goodbye to any notion of job security (if there is such a thing), less likely to form close bonds with colleagues, no career progression or training paid by someone else. You may well need to fork out for your own equipment, software, insurances etc. Sometimes you can be quite isolated in terms of your work (can be good or bad).

I personally love almost all aspects about contracting but appreciate it's not for everyone.

[bucksmanuk]

You should be paid more than this given the qualifications and experience. Being critical - The company knows you are a “handle turner”. You have turned up every day for 8-9 years and have shown no desire to leave -until now. Why should they pay you any more than they pay you today? This attitude is frighteningly common in industry.

Aerospace is quiet and until battery tech advances so much, we can have electric aircraft, I am of the opinion that, long term, it’s a dead horse. A friend of mine is doing work on electric aircraft propulsion and is getting £380/day. It was a push to get that. That’s with 30+ years’ relevant experience in aerospace.

CAD and design are becoming rather fragmented, as people become really good at being a CAD jockey, as the software requires more and more experience to drive it PROPERLY, like the previous place.- the drawing office is just that, an office where drawings are done. Design work is a joke and it’s left to the engineers to specify absolutely everything about the component. Even limits and fits have to be specified. There is no design talent to speak of in these offices.

Once you become a contractor it becomes very difficult to leave it, as the money is addictive, and so is the ability to think “you know, I don’t need to work with these wkers anymore -I’ll go somewhere else”.

Your contract rate should be your salary/1000 per hr as a rough guide. So £45K should be £45/hr. This number goes up and down with the following: -
State of the economy, and “your” economy, right now M&E building services pays exceptionally well. Aerospace, as you know - Not too much.
(8 years ago, everybody wanted high speed electric motor engineers. An ex-work colleague was cracking £750/day on the South Coast. Today, he is lucky to see £450/day, as lots of young people have come out of universities with lots of knowledge of high-speed motors. So, he has seen his rate halved (with inflation) due to the education “market” adapt to the employment market.)

The ability to transfer skills into different sectors.
The amount of competition for the role.
How far away it is from home? A big factor for me.
How long is it for? Job security – as alluded to above, in engineering - it doesn’t really exist nowadays…
How long do people stay for?
Do you have to stay away? (This destroys me emotionally)
Do you actually want to do their work? I had a phone interview with someone last year and the guy mentioned “you’ll be doing P&IDs”, and that was it for me, I was no longer interested, so I told him. He was most crestfallen as they needed the techy bit to create the P&ID.
Does the work lead to better times elsewhere? What I’m doing now.
What’s the feedback about the potential organisation?
IR35 takes £10/hr off your rate-ish, unless you really hammer your pension (like I’m doing)

“Getting things moving” – stay away from the nuclear industry then - that’s the last thing they need!

If I was to go contract at your age, I would be heading off to Europe, Oz, USA etc….

The staff engineering job market is manic right now, I have only seen it better in ’13 (due to O&G) and in the late 80’s. the issue is, the salaries haven’t gone up in about 8 years, I don’t mean they’ve gone up, but inflation only rises, they haven’t gone up at all.

I think a number of people (read HR) were hoping that IR35 would clear out the contractors and they would head for staff roles., it hasn’t really happened.

Engineering salaries have been going down pro rata about 1% p.a for about 50 years.
When I started work in ’86 my section leader told me that when he was at Leyland Vehicles in ’70, @ 24, he had just finished a day release HND, had bought a brand-new Ford Cortina 2000E with his Christmas bonus, and had just bought a decent 3 bed semi on his own, no partner, no inheritance. Now properties have gone up and so have cars, but pro rata I would be amazed if anyone at 24 in mechanical engineering in most of the country can do that today.

Mech Eng – 56, chartered, 26 years staff. Last 10 contract

[sam greenock]

I've been an IT contractor for nigh on 18 years and much prefer that way of working - the 2 posts above sum it up perfectly

[n3il123]

Having been an IT contractor for the most part since the early 2000s I'd say be aware that the headline figure sounds good, however I reckon that over the time i'd probably about equal if i'd progressed my perm career rather than take the highs and lows of contracting. I had a couple of long periods of no work in the financial crisis and then Covid, plus other periods of no work. This burnt through a lot of the money that I had saved. I was also terminated on the way home from abroad, by phone, in December with no notice as the project had to cut costs.

Another thing is that it is a lot harder to get the good (or any) rate for loans/ mortgages etc certainly in the first couple of years.

But then I don't do it "just" for the money, I like the project work, come in and do the job and then go without the permie BS.