First if you are a small business ie under 50 people and you either have less than £10mill turnover or less than £5mill on your balance sheet than you are completely exempt.Link
What difference does it make to a contractor if they are inside or outside IR35?
If a contractor is inside IR35 they cannot claim back expenses such as travel and accommodation near the client site as well as minor costs such as subsistence allowance.
Perm Staff for 3months v contractor cost for 3 months.
Leaving aside the ethics of hiring a person under the guise of a perm job when your business only needs them for 6months or less it may cost a more than a contractor.
A £45k salary would end up costing the company £58.16/hr.
Lets look at the lower end.Here is the breakdown of how a 35k member of staff ends up costing £45/hr.
A PLC programmer on a relatively low headline salary of £35,000 on a 40hr week with a lunch hour. Across the year this would be 1,624 hours when you take into account the mandatory holidays so 406hrs of work. Expect about 20hrs time spent finding the staff member 2hrs of interview prep for the HR and Engineering managers,4hrs, time spent discussing the requirements with a recruitment agency, negotiating the fees, drawing up contracts, meeting times and if there is more than one recruitment agency expect a bit of chasing and no show/recruiter misled candidates. Add on 4hrs on boarding time/IT setup and with the standard 1 week notice expect another 40hrs of work less so about 342hrs of productive work to be done.
For 3months this will cost £8,750.
Employers national insurance contributions are currently 13.8% so add £1207.50. Mandotary employer pensions are now 3% so add another £262.50 to this
5.6weeks mandatory holiday out of the 52weeks in the year is required so
The first cost of hiring a perm member of staff is obviously recruitment. The minimum figure recruiters will work for is 15% of the annual salary so add this £5,250 to the budget.
This brings the total to £15,470 for 342hrs of productive work a bit over £45/hr by a perm member of staff about the same as an experienced contractor.
There is also the indirect cost of an employee as they will have a notice period from their last job that may delay the project where as a contractor will be able to start immediately.
A contractor will come in with their own equipment they need to do the job. In the example of the PLC programmer this will be their own PPE, tools ,software and laptop which will all be top range so they can get the best results another cost to add when using a perm employee.
Payroll,HR and IT staff support are some additional costs that are often missed as well. Assume each one of those staff members is looking after 50people and are on a 25k salary. The cost of each person supported by the staff is £500. Initially with a new recruit they will use a lot of IT time as their machines are being setup and payroll time as they are being inducted to the company. On their exit they will need HR time to prepare properly to avoid disputes. If adding these £1,500 of additional costs we are looking at £50/hr cost to the company.
It takes 12months before the hourly cost on the new employee has dropped to an effective £30/hr