Managing finances is one of the most difficult parts of being a contractor, especially when your area of expertise is not related to money. For this reason, many contractors opt to use umbrella companies, which handle a lot of their money-related matters.
When you’re starting out as a contractor, it’s advisable to make an effort to get your head around some of the financial processes you will have to comply with.
Know your taxes
If you have previously been an employee rather than a contractor, you’ll be used to your tax being smoothly deducted from your salary, but as a limited company contractor you will have to deal with this yourself.
Corporation tax, income tax via PAYE, employee’s National Insurance Contributions, Employer’s National Insurance Contributions, Value Added Tax (VAT) and company and personal tax returns are just some of the financial aspects of being a limited company contractor.
Contractors dealing with their own finances need to concentrate on VAT and corporation tax, however. They will most likely need to make a major quarterly VAT payment, as well as an annual corporation tax payment.
Take advantage of expenses
As a company employee, expenses are something your employer generally takes care of. While workers may be involved in claiming their travel and subsistence expenses back, as a contractor you also have to think about expenses such as the company phone bill.
Contractors operating from a limited company have plenty to consider, from insurance and accountancy costs, to overheads like smartphones and broadband. There are also so-called ‘hidden’ expenses like pensions and private health cover.
Contractors should also look into which expenses can be offset against tax, hopefully saving themselves some money.
It is also very important they plan ahead and budget for all these costs; otherwise they could find themselves with cash-flow problems at difficult times.
Work out your income
Contractors can choose what they want to pay themselves, as well as how and when. This tends to amount to a low salary and a high dividend. However, it is vital that contractors only pay themselves what their business can afford, after considering monthly outgoings.
Consider using a contractor umbrella company
Most people go into contracting to be successful in the industry they specialise in – not to get caught up in financial legislation and tax, and if all of this sounds like a bit of a nightmare then consider using an umbrella company to deal with it all.
An umbrella company acts as your employer when it comes to payment. When it comes to PAYE and tax, for example, instead of being paid through the agency you invoice the umbrella company and they pay you, with PAYE and other deductibles already having been taken care of.
Signing up to an umbrella company should be fairly simple and quick (more info here), making it well worth the effort for people who want to avoid having to deal with their financial issues themselves. Good umbrella companies will offer full statutory employment rights, including maternity, paternity, sick pay and holiday pay.
It also means you can stop worrying about whether you’re working inside the law. Using an umbrella company means that professional will be dealing with your tax and administrative work, which ensures legal and tax compliance.