10 personal finance tips freelancers & contractors need to know

*Please note the information in this article may be out of date

Organised properly, freelancing/contracting can be the most rewarding way to make a living. Skilful tax planning can transform your finances - and with 15% of the workforce self-employed, financial services providers are at last offering the support contractors and freelancers need.

This Guide was written by Patrick Gribben, contractor and freelancer Tax Expert at Intouch Accounting. Patrick now writes for Listentotaxman.com on matters relating to contractor and freelancer tax. He and his colleagues are very happy to speak with Listentotaxman visitors to discuss any tax questions they might have – just visit the Intouch Accounting website for contact details.

This Guide was written by Patrick Gribben, contractor and freelancer Tax Expert at Intouch Accounting. Patrick now writes for Listentotaxman.com on matters relating to contractor and freelancer tax. He and his colleagues are very happy to speak with Listentotaxman visitors to discuss any tax questions they might have – just visit the Intouch Accounting website for contact details.

Organised properly, freelancing/contracting can be the most rewarding way to make a living, albeit a daunting thought if it’s your first time venturing into contracting. It doesn’t have to be scary, though. With some skillful tax planning you can transform your finances to protect your business, maximise your take home pay, and secure your future. Get it right, and you'll strike a work-life balance the envy of many.

Here are some of our top tips and tricks to ensure stability as a contractor. Every contractor is different, so we highly recommend speaking to a professional contractor accountant to ensure you are operating your business in a way that’s best for you.

1. PROTECT YOUR INCOME

The biggest drawback of being self-employed is the worry of being unable to work, right? Notnecessarily. Income Protection insurance will cover you for periods of sickness where you are unable to work, and there are now many insurers offering very competitive rates. Some policies pay your gross contract rate, rather than salary and dividends, and can provide an income all the way to retirement if you don’t recover. (Watch what you buy: standard accident, sickness and unemployment policies won’t cover freelancers or contractors.) Whileyou may think you can simply put money away and plan ahead, if you’re venturing into contracting full-time, it is recommended that you have this protection in place, as you never know what might happen.

2. Pay into a personal pension scheme

And while we’re on the topic of planning ahead, one of the things you should keep on top of as a contractor is your retirement fund. Make sure you’re paying regularly into a pension scheme - we promise you’ll thank yourself later. As the director of your own Limited Company, you qualify for pension contributions from your company, which are in turn eligiblefor tax relief!

Pension contributions are an allowable expense and they can reduce your tax bill by £190 for every £1,000 contributed. They also don’t have any National Insurance deducted. For contracts that fall within IR35, your pension can be deducted from your salary along with Taxand NI before it reaches you.

HMRC has a set allowance of £40,000 per year for pension savings and this must not be exceeded. However, you are able to carry over any unused allowance from the three previous tax years. Bear in mind that there is also a lifetime allowance limit which is £1,055,000, and while it is rare for this to be exceeded by most, we recommend speaking with a contractor accountant to see how you can maximise your savings with good tax planning.

3. Save money on life insurance

If you run your own limited company Relevant Life Cover could slash the cost of your life insurance. Buying cover through your business - instead of funding it from taxed income could save you thousands. Switch to Relevant Life Cover and you’ll save income tax and NI on the cost of premiums, you’ll still get Corporation Tax relief and there are no benefit in kind considerations. Your policy is held in trust so any payout goes direct to your dependents - rather than your company – and they’ll avoid inheritance tax when accessing the funds.

4. Save money on childcare

A new tax-free childcare scheme was introduced in October 2018 which can help contractorssave on childcare. For every £8 you pay to a registered childcare provider, the government will pay £2, up to a maximum of £2,000 per year. The childcare scheme is available for children up to the age of 15, or 16 for children who are registered disabled.

How do I qualify?

• You will not be eligible if your partner earns over £100,000 per year.
• Payment must be made via your online childcare account.
• Claims can only be made for childcare where you have parental responsibility for the child.
• Only registered childcare facilities/providers will be accepted.

It must be you personally, rather than your Limited Company, that applies and pays for your tax-free childcare. Any payments towards childcare made outside of the childcare scheme will not be exempt from tax or NIC deductions, including any cash payments made or invoices paid by your company.

5. Spread income around the family

Do family members help your business? If they answer calls for you or help with your books you could consider employing them. Each family member over 16 and able to work has a personal tax allowance of up to £12,500. A tax-free income for them is an allowable expense for you.

6. Get a mortgage

While it can be a little trickier for contractors to secure mortgages, it certainly isn’t impossible, and there are things you can do to make the process easier. Saving up a larger deposit, cleaning up your credit score and providing proof of future contracts which will all help your mortgage application.

A lot of mortgage providers may only take into account your salary, and this can be a problem when most contractors choose to pay themselves a low salary and the rest in dividends, even though these dividends could be proof of profit that would be considered enough to afford a mortgage.

Just because you don’t have a fixed salary doesn’t mean you should be penalised when it comes to applying for a mortgage. With so many people choosing to become self-employed, there are now plenty of specialist brokers out there who can offer mortgage deals tailored to contractors needs. For more information, check out Intouch Accounting’s blog on mortgage advice for contractors.

7. Hold back money for tax

It’s easy to lose track of what’s yours and what you owe the taxman – both in terms of income tax and VAT – so as you get paid, keep a running total and plan accordingly. Your contractor accountant should be able to give you a monthly snapshot of what you need to accrue for tax so you always know where you are. Never forget, though, this cash is still an asset. Those with limited companies should consider using a business savings account – a great way to makemoney work for you until the date the tax is due. Sole-traders can use these funds to reduce the interest on their mortgage and pay down the loan amount if they have an offset mortgage account, and get one step closer to the ‘mortgage free’ dream.

8. Protect yourself from an IR35 investigation

IR35 is on the tip of everyone’s tongue at the moment, and come April 2020, the rules regarding IR35 and private sector contracts will be changing. It will now be the end client’s responsibility to determine your IR35 status. But you still need to be aware of your own status and make sure you are not in breach of the rules.

In the event of an investigation, Tax Liability Cover (IR35 insurance) can pay for a professional to fight your case, and even cover liabilities if you are found to be in breach.

To find out more about IR35 and what it means for you, check out our Contractor’s Guide to IR35.

9. Invest in good business insurance

Whether it’s public indemnity, professional liability, business interruption insurance or simply buying cover for your kit, the right insurance takes the uncertainty out of life and inspires confidence in clients. (Having appropriate professional insurances in place can help validate your IR35 status, too.) Specialist contractor insurance firms have standard packages that include all the cover a contractor will need.

Don’t forget your own needs: you are your business. Private medical insurance won’t just help you to avoid NHS waiting lists, it’ll get you back to work quicker, too.

10. Have some money saved for a rainy day

If you’re just starting out in contracting, it’s a good idea to have some savings in place while you’re getting your feet off the ground. Six months’ worth of savings gives you the chance to settle into contracting and get a feel for what you like and don’t like.

Contracting is about choosing the lifestyle you want, so having some financial backup meansyou don’t have to take contracts for the sake of being paid, and instead can focus on doing things you enjoy and that will enhance your portfolio. Having savings is also a good idea in case you have a dry spell (every contractor will go through this), or if you are unable to work for any reason.

Use your funds to build an investment portfolio: you can save up to £20,000 per year in an ISA (and up to £4,368 in a junior ISA for each child) – and benefit from tax free growth. Save and invest: you’ll not only protect your independence but secure your future prosperity too!