One of the most misunderstood aspects of contracting is the difference between contractor and employee rights. Contractors who work through a limited company or umbrella have a fundamentally different legal relationship with their clients compared to permanent employees.
What permanent employees receive
Employees in the UK are entitled to a comprehensive set of statutory rights including paid annual leave (minimum 28 days including bank holidays), statutory sick pay, statutory maternity and paternity pay and leave, protection against unfair dismissal after two years of service, redundancy pay, employer pension contributions under auto-enrolment, and the national minimum or living wage. These rights are funded by the employer and represent a significant additional cost above the employee's gross salary.
What limited company contractors receive
Contractors operating through their own limited company receive none of these statutory employment rights from the end client. You are not entitled to holiday pay, sick pay, parental leave, pension contributions, or redundancy payments. Your contract can typically be terminated at short notice without any severance obligation. This is the trade-off for the tax efficiencies and higher gross income that contracting offers.
Inside IR35 — the worst of both worlds?
Contractors working inside IR35 face a situation that many consider unfair. They pay employment-level taxes (income tax, employee NICs, and employer NICs are all deducted) but do not receive any of the employment rights that permanent workers enjoy. This tax-without-benefits situation is the primary reason contractors actively seek outside IR35 engagements.
Umbrella contractor rights
If you work through an umbrella company, you are technically an employee of the umbrella. This means you do accrue some statutory rights, most notably paid annual leave. However, this holiday pay is typically funded from your own gross assignment rate (it is accrued and then paid out rather than being an additional benefit), so the financial effect is largely neutral. You may also receive a workplace pension under auto-enrolment, again funded from your gross rate.
Knowing your position
Understanding where you stand legally helps you make informed decisions about rate negotiations, contract terms, and risk management. If you are giving up all employment protections, your day rate should reflect this. Many experienced contractors use the value of lost benefits as a benchmark when setting their minimum acceptable rate.