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4 Ways Contractors Get Their Finances All Wrong

As a contractor, it’s up to you to take responsibility for your lifestyle costs and structure your financial arrangements to cover them.

However many contractors overlook simple steps that can be taken to enjoy greater working flexibility, more free time and the potential to increase the money made as an independent contractor when compared to being a permanent employee.

For some this means using a limited company to manage the income from their contract efficiently or using an umbrella company to minimise the paperwork involved in being self-employed. Whatever you decide, it’s important that you ensure you are in control of your finances and that you have sufficient income to pay all your liabilities, including tax.

As you know the regulations around taxes for contract workers are constantly under review and continually changing, so it’s important that even the most experienced contractors regularly keep themselves fully informed and up to date.

As the financial health of your contracting business is key to your financial wellbeing you have to ensure you keep ahead of the game. To start you off here are Contracting Scout’s 4 easy tips.

 

No1.  Choose a payroll option that works for you

It is vital to consider using a payroll option that works for you. You should regularly review how you are paid and assess whether an umbrella company or a limited company is best for you.

Working through an umbrella company – This is effectively having a “middle man” between you and the client. The umbrella company will manage everything on your behalf, such as national insurance, PAYE deductions, expenses, invoicing etc. You become an employee of the umbrella company with an overarching contract of employment but still enjoy the independence of being a contractor.  The umbrella route is a popular option that is straightforward to join, takes the hassle out of contracting and gives you the perks of being employed, however it is often seen as the least cost effective option making it more popular with contractors who want more free time rather than tax efficiency.

Setting up a limited company – By doing this you become a company director of your own entity and will need to incorporate your company officially with UK Companies House. Then, you take a small salary and pay yourself in dividends. However, this route requires a lot of administrative effort and generally results in contractors appointing an accountant. If you choose to pay yourself through dividends, recent changes mean only the first £2,000 of dividends benefits from dividend tax free allowances.

Whilst a limited company is useful for contractors with a high percentage of expenses or those that want greater flexibility on how their contract value is handled, they can be onerous in terms of time and cost to administer.

IR35 for contractors

One important factor to take into consideration for all contractors is whether or not you are within the IR35 regulations. IR35 was designed to prevent tax avoidance by workers providing their services through an intermediary to avoid being classified a permanent employee, which would happen if the intermediary were not used. The regulations do not apply to umbrella companies. However if you are within them, as a contractor, you will not be able to take dividends from your limited company which may impact your decision on how to best structure your finances.

Read more about IR35 here.

 

No 2. Start saving for retirement today

Whilst you may enjoy what you do, it would still be great to retire one day. So another useful area to review is the way you currently facilitate your pension contributions.

If you work through your own limited company, you can contribute pre-taxed company income to your pension. As an employer contribution counts as an allowable business expense, your company receives tax relief against corporation tax, so the company could save up to 20% in corporation tax. However you must ensure that your contributions abide by the rules for allowable deductions.

Alternatively, you might choose an umbrella company that offers a salary sacrifice pension scheme. This is where some of your income is invested into a pension on your behalf before your funds are subject to tax. While it’s a requirement for your umbrella company to auto-enrol you onto a pension scheme, many contractors simply opt out in order to maximize the funds they take home in the short term, rather than thinking about the future.

 

No 3. Negotiate the supplier services costs

As an independent contractor, you’ll know that every penny counts but you’ll be incurring costs from lots of different suppliers, including:

  • Mobile phone providers
  • Service providers
  • Payroll providers
  • Business insurance
  • IT support
  • Accountants
  • Lawyers

You should compare costs regularly by checking online for competitive deals from other suppliers, talk to contractors who have used different providers to find out their experiences or even ring up new potential suppliers to compare costs, chat about your requirements and negotiate better deals. It’s important to review these contracts regularly to make sure you’re getting good value for your money.

By shopping around for different providers you could potentially save hundreds of pounds. A contractor brokerage service is definitely worthwhile and ideal as they collate all the information that a contractor will need to ensure you can make the right decision for you. This can save you valuable time as they can do the comparing for you.

 

No 4. Think about the bigger picture

It’s important to consider your own circumstances, especially if there are any changes coming up in the next 6-12 months. Are you getting married, planning to buy a house or perhaps thinking of working fewer hours to spend more time with your family? Do you want to take time off to travel or pursue other interests? Or do you wish to start working remotely? Contracting can serve as an aid or a hindrance to your lifestyle depending on what stage you’re up to.

As part of the bigger picture it’s also worth looking at the changes in the economic or political landscape that might be coming up – an impending Brexit might mean the exit of foreign companies from the UK and the IR35 changes that affected public sector contracts are scheduled to  impact on those working in the private sector at some point in the future (reducing your potential to process your funds efficiently). However the key to success is turning challenges into opportunities. For example there might be fewer contractors competing for work and new projects designed to facilitate companies leaving the UK.

Making sure that your contracting arrangement is robust and works for you and your needs long-term will take some planning but it’s worth the time and investment.  Carefully assessing your financial situation will allow you to formulate a good strategy to progress in your contracting career, rather than coast from contract to contract.

 

Next Steps – Contact Contracting Scout for a Contracting ‘Health Check’

As an independent and confident contractor, it is your responsibility to make sure your arrangements are in sound financial health. This means you need to regularly review the money going in and out of your business, who your service providers are and whether they’re providing you with value for money. This may seem quite a daunting task, however Contracting Scout is here to help.

By offering unrivaled guidance and support, we can help you simplify the way you work by providing you with information to make the most out of your contracting career. The range of providers we work with cover everything from tailored payroll strategies, through to insurance policies and securing a mortgage. Contact us for a personalised illustration with an overview of your options.

If you know a contractor who could benefit from a contracting ‘health check’ why not refer them to us and you could win a visit to London’s Sky Garden plus up to £600. Find out more here.

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