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8 Ultimate Finance Tips for Limited Company Contractors

Being your own boss as a limited company contractor has many advantages, from greater control over the work you do to simply being able to escape office politics.  For many who choose to work this way, one of the biggest draws is the opportunity to manage your own finances and the potential to earn a virtually unlimited income (if you are willing to put in the hours).

However, with this greater degree of control comes additional responsibility. After all, without regular guaranteed income, you will need to think pro-actively about how to manage your finances – from household bills, to taxes and of course, building up an emergency fund or investment portfolio to reduce your reliance on having a contract that could end tomorrow.

Below we have pulled together a few tips for you to manage your finances as a limited company contractor a little bit better.

  1. Set the budget from the start

When you’re an employee of a company, you don’t have to worry about paying for your pension, health insurance, your company phone or your national insurance contributions as all of these are managed by your employer.

However, as an independent contractor, there are many sometimes hidden expenses you should keep in mind, including:

    • Professional indemnity insurance
    • Work expenses, such as phone broadband, laptop and an equipment, travel expenses etc
    • Private health insurance
    • Private pension contributions

    Remember to budget for these early on to cover all eventualities.

    Contracting Scout can provide useful information about organising your insurance needs as a contractor so please contact us to discuss.

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    1. Account for taxes

    As an independent contractor with a limited company, you will be responsible for paying your own taxes and will have to file a tax return. Whilst a good accountant can help you manage the tax matters, you will still need to pay for their services along with the following expenses yourself:

    • Corporation tax
    • Income tax through PAYE
    • National Insurance
    • VAT
    • Company tax return and personal self-assessment tax return

    Contracting Scout can assist you with finding an experienced contractor accountant to handle your financial paperwork and who can advise you on the most tax efficient way to pay yourself as an independent contractor through a limited company.

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    1. Start building an emergency fund

    All independent contractors should think about setting up an emergency fund from the first day they become a contractor. Your personal situation will change over the years, so it’s best practice to have some money saved up for a rainy day. The easiest way to do this is to set up a standing order into a savings account of your choice for the end of the month – this way the money is deducted before any other expenses are paid for and before you have a chance to spend it.

    Remember, you won’t get holiday or sick leave as an independent contractor, so you need to have a backup in case of any unforeseen emergencies.

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    1. Open a business account

    Creating a separate business account is a legal requirement when you set up your own limited company, but having proper management of this account and choosing the right one will make your life a lot easier. There are many different types  of business accounts available, so here are some key components which should be considered when selecting which account to use:

    • Interest rates- Certain business accounts pay interest on your balance, so double check which ones do.
    • Fees – A lot of banks offer introductory rates with no fees for a year or 18 months, so compare your options to find the best account to suit you.
    • Reviews – Compared to retail banking, it’s sometimes harder to find reviews and testimonials from other business bankers. Ask your accountant, clients or suppliers who they use.

    Once you have decided on a bank, make sure you check your bank statements on a regular basis and monitor all the transactions you make to avoid excess bank charges.

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    1. Pay yourself regularly

    Contracting won’t give you the same income each month. Make sure you pay yourself regularly. This will help to reduce the stress of having a variable monthly income. It will also make budgeting more straightforward. You should keep investing in your business, but do not forget to pay yourself. This will give you peace of mind, make it easier for you to predict upcoming tax payments and help you to calculate how much you’ll earn over a 12 month period.

    For more ideas on ways to increase your earnings as a contractor read this.
     

    1. Widen your client base

    The old adage “don’t put all your eggs in one basket “applies to your clients. Ensure you do not rely on one big client. If that client terminates the contract you could be left with no income and a potential panic to find a replacement. If you build a large client base, or at least a network of contacts, you will give yourself a greater chance of financial stability in the long term.

 

    1. Predict your earnings

    If you have contracts signed for the next year then it isn’t too much of a problem to budget for the upcoming twelve months but many independent contractors work on shorter contracts. As you pay yourself regularly, you should be able to make an accurate prediction of what you’ll earn over the course of the year. Ensure that you create continuity in your spending habit by knowing what you can and can’t spend each month.

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    1. Seek Professional Advice

    There are additional considerations for an independent contractor. You may require financial and/or legal assistance. For instance obtaining a mortgage as an independent contractor may be a greater challenge than for a full time employee.

    This is where Contracting Scout can help. We offer access to business insurance, residential mortgages and accountancy services for the independent contractor.

    Contact the team at Contracting Scout or request a brochure for more information.

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