Money management tips for contractors
For most people in permanent salaried roles, money management can often be as simple as ensuring there is enough to cover your outgoings, with something extra going to one side in the form of savings if possible. However, for limited contractors, there is much more to consider.
Despite this, keeping on top of your accounts does not necessarily need to be a difficult task. As long as you are aware of your financial obligations, managing your finances doesn’t have to be difficult.
Limited company contractors are required to pay a number of taxes, with each of them due at different times and calculated in a different manner.
Corporation tax – Limited company contractors are required to pay corporation tax based on the profits of the company. This is levied once per year and is usually paid nine months after the end of the accounting period.
Income tax – The vast majority of people are aware of income tax as this is payable on most earnings. This includes salary, pensions’ income, interest on savings and income from a share portfolio. It is paid monthly through the Pay As You Earn (PAYE) payroll system.
National Insurance – Your contributions through National Insurance are the things that entitle you to a state pension, access to the National Health Service and other state benefits. These are again made through the PAYE system.
All limited company contractors are required to complete personal tax returns and this can prove to be a significant undertaking, particularly for those with little or no previous accountancy experience.
For limited company contractors, an additional company tax return must be completed and this is often even more difficult. As a result, many choose to engage the services of an accountancy services provider to assist them, particularly as this can significantly reduce the amount of time it takes to submit the return.
Those who attempt the task alone are often required to take two or three days off to finish the necessary administration, meaning they are unlikely to be bringing in any money during this time.
As a result, it is often more financially prudent to enlist professional help, especially as there are a number of expenses you may be entitled to claim for but are not aware of.
Many business expenses can be offset against the level of tax you are required to pay, including insurance, legal fees, mobile phone contracts, broadband, travel and subsidence as long as they are incurred wholly, necessarily and exclusively in the performance of your duties.
A qualified accountant will point out what you are and are not entitled to claim for – which may even help to avoid the stress of an investigation by HM Revenue and Customs.
Regardless of whether you need to take time off for holidays, sickness or a period between contracts, it is important to manage your finances efficiently during this period.
Limited company contractors are recommended to build up a buffer of between three and six months’ earnings as this will help to guard against emergencies where you cannot work for some reason.
Get help when necessary
With so much to consider, it is easy to see how contractors may become overwhelmed when it comes to managing their finances.
If bookkeeping and administrative tasks are detracting from your life outside of work, or affecting the quality of service you are providing to clients, you may well find the benefits of seeking professional assistance are more than justified.