Are you being paid enough as a Software Engineer Contractor?

Previous experience
Your compensation should align with your experience, as mentioned earlier.
Different industries tend to offer varying pay scales, so industry-specific experience is a crucial factor.
Keep in mind that certain skills are in higher demand and command premium rates. According to the 2023 state of Tech salaries report more employers are seeking security Engineers, Data Engineers, Machine Learning Engineers and Back Engineers than last year, see the most in-demand software for each of these roles in the table provided by Hired.com. 

The key player here is IR35, or the Intermediaries Legislation, which categorises roles as either "inside IR35" or "outside IR35." This classification has a substantial impact on how income tax and National Insurance contributions are computed, thus significantly influencing a contractor's net retention.

You can find out more about understanding off-payroll working (IR35) on the government website.

What will IR35 do to your pay?

Inside IR35
When your role falls within IR35, it indicates that your working arrangement closely resembles that of an employee, resulting in taxes being withheld at the source. This will have consequences for your take-home pay, with two key factors at play:

1. If you are contracting through an umbrella or payroll company, you'll not only have the usual employee tax deductions but also be required to make contributions to Employers' National Insurance (NI). Furthermore, other additional expenses typically covered by an employer for an employee will be deducted from your total day rate.

2. If you are hired under the client PAYE option, this entails benefits such as holiday and sick pay, Employers' NI contributions and the apprenticeship levy (if applicable) will be paid in addition to your base pay rate.

Both options fall under the IR35 category, but differences in where specific deductions are made can have a significant impact, making it essential to pay close attention to the details.

Outside IR35 
In contrast, roles falling outside of IR35 provide increased flexibility and generally come with higher pay rates, as they classify you as self-employed for tax purposes.

However, since the reform, the market has witnessed inside IR35 roles offering compensation typically up to 20% higher to account for the associated tax considerations.

Please be aware IR35 regulations can be complex, and it's essential for both contractors and clients to understand and comply with these rules to avoid potential tax penalties.

Many organisations use assessments or engage tax experts to help determine the IR35 status of engagements. For instance, there is the "CEST (Check Employment Status for Tax) tool," which is accessible here.

Where to get advice?

When it comes to understanding your worth as a contractor, you don't have to navigate the pay maze alone.

My advice: Connect with professionals like myself who specialise in contract recruitment. We are well-informed about industry trends and can offer tailored guidance that aligns your skills with current job opportunities. Get in touch here. 

Payroll Companies: If you're exploring opportunities in the contract market and have uncertainties about rates and your net income, I recommend contacting a payroll company.

Many of these companies provide simulations of your net pay, allowing you to understand and question your pay deductions.

Some payroll firms even offer pay rate benchmarking services that can help you assess how your earnings stack up against others in similar positions and they most likely wouldn’t charge for such a service.

Overall market overview

From the previous spikes we saw during the pandemic for tech roles creating an extremely candidate-driven market, we have seen this relax quite significantly in 2023. The general challenging economic climate, alongside continued political unrest’s impact especially the continued war in Ukraine, cannot be underestimated on the overall market.

Nevertheless, while we have experienced a slight lull, contractor roles are now increasing, even if it is slow.

Securing technology talent, both permanent and contract, remains key to many businesses in a host of sectors and it’s important to remember that your expertise is valuable and your pay should reflect it.