Contracting can be a highly rewarding career path with many contractors being in control of their own career progression, enjoying freedom and flexibility to work on a number of different projects with a range of different clients.
Contractors also benefit from being paid well, due to the fact that they are usually brought in to fill a skills gap within a company, or bring a level of expertise and specialism.
However, one challenge contractors may face is money management and being financially savvy.
In this guide, Umbrella Search outlines smart financial strategies for successful contractors in 2024 to help you get on the right track and make the most of the career opportunities and growth as a contractor.
Budget wisely
As a contractor, you will need to ensure that you are budgeting wisely.
It's always a good idea to build up an emergency fund savings pot that you can draw upon should you need it. You might find that you need to take some time off, or struggle to find a new contract straight after one contract ends. If this is the case it’s important to have a savings pot you can dip into to tide you over in quieter times.
If you are a self-employed contractor, you will also need to ensure that you are budgeting for tax.
After all, these contractors will pay their tax through self-assessment. This means that you will need to set aside enough of your income to cover the tax bill you will owe. Again, we would recommend that you have a specific savings pot for tax and national insurance, to make sure that you don't get caught short.
If you contract through an umbrella company, you will not need to worry about setting aside enough money for tax. This is because the umbrella company takes care of taxes for you, deducting what you owe before you are paid.
This is a huge relief to many contractors, and one reason that umbrella companies are so popular.
Umbrella companies will need to budget for the cost of the umbrella company however. The good news is that this cost is taken off your pay before you are paid, meaning it reduces your tax liability. More great news is that umbrella company fees remain competitive and relatively low, so this won’t be a huge outgoing each month. Find out more about umbrella company fees and what you can expect to pay here.
If you are a contractor working through a limited company, as well as budgeting for tax, you will also need to budget for an accountant. This is because company accounts can be very complex. When operating through a limited company you will not only need to file your own personal tax return, you must also file company accounts each year, a corporation tax return, VAT returns if you turnover more than £85,000 and run a payroll if you are employed by your company and employ anybody else.
For this reason, most contractors utilise the services of an accountant to help them take care of these tasks. Although this is a helping hand, it is an additional cost coming in at around £2,000-6000 per year.
Track income and expenses
Part of budgeting wisely is understanding what you have coming in and out.
Let's say your current contract lasts for 6 months, you will know how much income you will be receiving in this time to help you plan ahead.
Whilst you may not know all your outgoing expenses, it’s important to make note of any expenses that occur.
It can be handy to use software here, such as xero or quickbooks, or even just keep a spreadsheet. These tools can help you visualise, track and manage your cash-flow and expenses and understand what you have coming in and out.
Keeping track of your expenses is especially important for contractors, who are able to claim back certain legitimate business expenses from their tax bill. Make sure to keep receipts and invoices as proof, which you can upload images of to the software of your choice so you always have quick access to records.
The great news for umbrella company contractors is that the umbrella company will help with their expenses. Simply inform the umbrella company of expenses incurred and they will take care of the rest.
Plan for the future
It’s easy to live in the moment, but planning for the future and for retirement is crucial.
For the self-employed it can be tempting to pocket all of your income, however it’s important to pay into your pension. After all, unlike employees, the self-employed are not auto-enrolled on a pension scheme and so must ensure that they do this themselves.
This can be as easy as setting up a pension scheme with the likes of Nest Pensions, and paying in a direct debit each month. What’s more, as you are employed, the government will match your payments by 25%. Anything you do pay in will also be subject to tax relief, reducing your tax bill.
If you operate through an umbrella company, the great news is that because you are an employee of your chosen provider, the umbrella company will auto enrol you onto a pension scheme, and they will pay a percentage into your pension pot as your employee.
Take the next steps with Umbrella Search
Now your finances are in order and you have a plan for financial success going forward, you may decide that working through an umbrella company will make your contracting career a whole lot easier.
After all, operating through an umbrella company means no worrying about saving for tax, filing complicated tax returns, submitting expenses or organising your own pension pot.
If you have decided this is the best move for you, Umbrella Search can help you find the best umbrella provider out there. Simply get in touch with our friendly team of professionals and we’ll take care of the rest.
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