Contractors, freelancers and the self-employed made up a record high of 15.1% of the workforce in 2017.
Contracting has many benefits, but the unsecure nature of the work means financial security is one of ebbs, flows and unpredictable income streams.
Successful contractors know that planning ahead is key to staying at the top of their game.
This is especially important as we enter the somewhat uncertain financial climates of 2019. Now, more than ever, contractors need to stay one step ahead of the curve.
Below contractor accounting specialists, Pulse Accounting, share their top tips on how contractors can gear up for a successful 2019 this January.
Now is a great time to carry out a financial audit
A contractor’s income is not guaranteed nor steady from month to month. For this reason, contractors must keep on top of their finances to ensure stability and prosperity.
The best way to prepare your finances going into 2019 is to start by undertaking a financial audit of the last six months.
This gives a complete financial overview – highlighting your income, outgoings and signposting exactly where your money is going.
To carry out an audit, follow these steps:
- Calculate your overall income over the period
- Calculate your overall outgoings over the period
- Categorise these outgoings: this could be ‘rent/mortgage payments’ ‘leisure and entertainment’ ‘holidays’ ‘food’ and ‘transport.’
- Calculate tax, National Insurance and pension contributions made or due
This will give you a real insight into where your money is going, and it will help you to pinpoint areas in which your spending can be reined in.
After all, realising you are spending £50 on takeaway coffee a month might come as a nasty surprise and may well be an area you will want to work on going into 2019.
Set a budget for 2019
Once you know what you’re spending, you can set a realistic budget for what you’ll save, cut down on and spend.
For contractors, income typically fluctuates. With busy periods as well as slightly quieter times, contractors must plan ahead and create a budget that accounts for these inevitable ebbs and flows.
We suggest that contractors break down and budget their income following the 50-50 rule.
Under this rule, contractors should aim to live off 50% of their income. This will cover rent or mortgage payments, bills, food, leisure and entertainment and any additional living costs.
Of the remaining 50%, contractors should aim to put between 10-20% into savings. This is important for financial security and will ensure you have an emergency fund in case of the unexpected.
The final 30% of this sum can cover tax contributions, National Insurance and pension payments. Setting aside a sum of this size will guarantee no nasty surprises when the tax bill arrives.
Budgeting a contractor’s income along this structure will ensure that even in the quieter periods without work, contractors will be able to live comfortably, pay their taxes and continue to contribute towards their personal savings.
It’s always best to go into the New Year prepared for whatever it might bring.
Maximise your income
For contractors, there are certain legitimate ways to maximise income.
The way a contractor chooses to operate can have significant implications on their income.
For example, contracting through a limited company can be far more profitable. Contractors operating through an umbrella company may therefore wish to kick off the New Year by considering the way they work.
Considering the average wage for a contractor in the UK was £57,000, for the tax year 2018/2019, those contracting under an umbrella company would take home £35,635 versus those under a limited company who would take home £44,914.52.
Although contracting through a limited company can be more time consuming, a good accountant can take care of the paperwork and ensure you are contracting in the most tax-efficient way possible.
Contractors can also offset certain business expenses against their tax bill. Business expenses cover a contractor’s everyday costs such as travel, insurance, any subcontractor fees, marketing or advertising, running an office and any equipment necessary.
Contractors inside IR25 can claim a 5% flat rate of their income as well as pension contributions and some professional subscriptions.
Invest in yourself
Make 2019 the year for improving your skill set, enhancing your knowledge, training and expertise.
Businesses are increasingly interested in short term skill sets. The number of contractors in the UK is currently at a record high of 1.9 million with industries including IT and Engineering amongst the top for hiring contractors in the UK, although this list is far from exhaustive.
A successful contractor knows that contracting is all about keeping themselves and their skills competitive. Whether you’re an app developer or a Facebook strategist, being at the top of your game in your industry will mean you can apply to top paying contracts and reap the financial rewards.
Keep alert to what skills are in demand in your industry or niche at all times. Let’s take an IT contractor. GDPR is currently high on the agenda, meaning contractors in this industry would fare well to gain or improve their skills in this area.
Do your research. This will help you anticipate specific skills that are in demand in your sector and allow you to identify niche markets to which you can apply these skills.
Think about the future
Nobody can predict the future, but you can plan for it.
As the UK prepares to depart from the European Union this year and with more off-payroll reforms set for 2020 which are set to affect contractors, it’s always best to be prepared and stay a step ahead as 2019 commences.
Consider and plan how you will utilise your skills in the coming months and years. Creating a solid business plan for 2019 will give you a competitive edge.
- Perhaps you have recently worked on a contract that went really well. Could you bring further ideas, initiatives and developments to the client?
- It could be worth targeting your contracting services to clients that won’t face the immediate effects of off-payrolls changes coming into play in 2020. These will be smaller, private sector clients.
Whatever 2019 brings, following our handy tips, contractors can stay one step ahead of the game and make year one of their best yet.