Budgeting Tips for Contractors

For many, the draw of contracting is being able to choose who you work for, where you work and the rate you want to charge. The flexibility that contracting offers, does have a downside – getting a contract is never guaranteed.  

Here are our top budgeting tips to help you manage in times when you aren’t working because of illness or the lack of available contracts:

Decide on your structure

When you decide to become a self-employed contractor, there are three ways you can operate, as a sole trader, through an umbrella company or through your own limited company.

Contractors who plan to make contracting a long-term career choice, frequently choose the option of working through their own limited company. Firstly, you have limited liability for any financial loss the company makes, and secondly, your take-home pay will be higher when compared to working as a sole trader or via an umbrella company.

The downside of working through a limited company is managing the paperwork that is generated from the various director responsibilities. There is no need to panic though, as an experienced contractor accountant, we can help you with this.

Calculate your optimum rate

If you are new to contracting or are planning on working short contracts, it is essential that you have a good grasp on your monthly outgoings i.e. mortgage / rent, utility bills, food shopping, loan or credit card repayments etc. Knowing what your outgoings are will make setting your rates that much easier.  

Know where you stand with money

If you decide that working through a limited company is the best structure for you, you must remember that any money held within the business does not belong to you. It belongs to the business. You can only withdraw money held within the limited company via a salary, dividends, or a combination of both.

Using the business’s money for personal expenses, or vice versa can cause issues further down the line, which can be difficult to resolve.

Make saving second nature

When a contractor joins us one of the first things we tell them is put money away each month to cover their tax liabilities.  As a general rule, we recommend putting away between 25% to 35% of your monthly turnover.

In addition to this, it also advisable to set aside a further 10% to 15% as savings that you can draw on at times when you are not working.

Saving money may not be in your nature but getting into the habit of doing it early on in your contracting career will help you manage your cashflow and ensure you have money to see you through the quiet periods.

Don’t be late with payments

A very simple piece of advice, but with hectic schedules, it can be easy for things to be forgotten. To avoid late payment fees and interest payments, make sure you pay things like credit cards on time.

Some of the contractors we work with have found it helpful to set a direct debit to cover the minimum payment.

Get professional help

We may sound biased in saying this but engaging with an experienced accountant will truly save you time and money. With over 20 years’ experience of working with contractors, we can advise on which structure is best suited to you, give guidance if you need to be VAT registered, offer clarification on expenses and assist with preparing and submitting accounts to HMRC.

If you would like more advice about contracting, download our ‘Free guide to contracting’.

If reading this has spurred you on to get a handle on your accounts, give us a call on 01962 867550 to see which monthly accounting package is best suited for you.