Switching from Permanent to Contracting Legally
It's possible to switch from a permanent employee to a contractor at your current company, but you must consider employment law, IR35, and conduct a genuine status change for compliance.
Can I Legally Go from Permanent to Contracting at the Same Company?
Switching from being a permanent employee to a contractor for the same company is a question that comes up time and again in the UK workforce. With the boom in flexible working and the perceived perks of contracting—think flexibility, higher day rates, and personal autonomy—many people eye this move. But what are the legal, practical, and taxation issues? Let’s break it down together.
Key Points to Consider
- Employment Law: Are you genuinely changing your working status, or just shifting labels?
- Tax Status (IR35): Is your new role truly outside IR35, or would HMRC still regard you as an employee?
- Company Policy: Does your employer allow such transitions?
- Motivation: Why are you making the switch—personal growth, increased earnings, or company request?
Understanding the Legal Framework
If you resign from your permanent position and immediately return as a contractor, several issues arise:
- Genuine Change of Relationship: The law focuses on substance over form. Are your duties, level of control, or working methods actually different?
- IR35 Compliance: If HMRC believes your contracting gig is just your employment rebranded, you and your client could face tax repercussions.
- Continuity of Employment: Be aware—if you work as a temp, some rights (like unfair dismissal protections) tie to continuous service. Breaking continuity might affect these.
"Switching from employee to contractor can be straightforward if it's a genuine change. But beware: tax law doesn’t just go by your contract—it looks at the actual working relationship."
Legal & Practical Checklist
| Step | What to Review | Why It Matters |
|---|---|---|
| Resign Properly | Serve notice and follow company policy | Maintain a clean record |
| Establish a Limited Co. | Register your own limited company or use umbrella | Structure for contracting |
| Review IR35 Status | Use HMRC tools or get a professional contract review | Avoid tax pitfalls |
| Agree New Contract | Terms—duties, hours, autonomy | Proves genuine contractor status |
| Get Written Agreements | Have a clear contract with your (now ex-) employer | For legal clarity |
Pitfalls & Common Myths
- "My employer said it's fine—so I'm covered."
Even if your business approves, HMRC makes the ultimate call on employment status for tax. - "Changing job titles = real change."
Not if your daily work or reporting lines remain the same. It has to look and act like a contractor arrangement. - "This happens all the time—it must be legal."
Prevalence doesn’t make it compliant.
"The most common mistake is failing to create a clear, demonstrable difference in your new working arrangement. HMRC is sharp—don’t underestimate their scrutiny."
How to Ensure a Legitimate Transition
Ask yourself:
- Will I have control over my work and how I do it?
- Can I substitute someone else to do the work?
- Am I exposed to financial risk, like a real business?
If you answer "yes" to these, you’re on the right lines for contracting. But get a contract review from a specialist—that’s worth its weight in gold.
"It’s often better to have a break (even just a few weeks) between employment and contracting with the same company. This gap helps demonstrate there’s no continuous relationship."
Practical Tips
- Get advice from an accountant or legal expert in contractor status and IR35.
- Make sure your new contract reflects real autonomy, not just a re-badged staff role.
- Keep documentation – emails, contracts, and status determinations.
Quick Comparison: Employee vs Contractor
| Feature | Permanent Employee | Contractor |
|---|---|---|
| Tax handled by | PAYE | Self/Company |
| Benefits (holiday, sick) | Yes | Usually No |
| IR35 Safeguards | Not relevant | Highly relevant |
| Notice periods | Statutory/company | By contract |
If you want flexibility, higher day rates, and are happy to run your own business (with all the admin that entails), contracting might suit you. Just don’t cut corners on the legalities—you want the benefits without the stress of an HMRC challenge.
Ready to Make the Switch?
Get your contract reviewed by an IR35 specialist and talk with an accountant before making any moves. If you have questions about your own situation, reach out to a professional or use HMRC’s CEST tool for a status determination.
Don’t just tick boxes—make sure your move is legally watertight.
