In Part 1, I discussed the fundamentals of being a contractor in the UK. In this post, I will cover some aspects of an (outside IR35) contractor's finances. This should also shed light on why you can't make a direct comparison between a contractor's rate and an employee's salary.
Over the course of the years, I picked up a lot of profitable tips for contractors. I have not yet found one central place that lists them. And so, hopefully this post will prove useful.
I must emphasise that I am not an accountant and not a tax consultant, and you might want to speak to one to discuss your own circumstances.
With the legal bit out of the way, here are a few things you should do if you're a contractor:
Withdraw only what you need
Withdraw as much money as you need from the company to cover your day to day expenses and to top up your ISA, but no more. Your accountant could help you efficiently split your withdrawal between your salary and dividends.
There are two reasons for this advice:
- The lower your income, the less tax you have to pay.
- Money left in the company can be invested without paying any additional taxes that you would have to pay when withdrawing the money. You could, for example, lend it to another company of yours that invests in real estate. Or, you could put it into a savings account.
It stays in the family
Is your spouse working? If not, can they help you with your business? If so, add them to the company as directors. They can then withdraw a salary and increase your effective tax allowance. They can also own shares in the company, allowing them to withdraw dividends. There are other benefits to having them as employees of the company, as we'll see next.
Take care of your employees
Your company has at least one employee, and that's you. Your spouse may also be an employee. Employees are entitled to some perks from the company. Categorised under staff welfare, you can buy each employee a £50 gift card every other month. I have a reminder in my calendar to do this every other month. Follow the link to make sure you get this right.
It's party time
Another tax benefit a contractor has is an allowance for an annual event. The amount is £150 per person (so, if you and your spouse are the only employees of the company, your budget is £300). As with all other allowances, read the fine print. You can split the budget into two events, so long as you hold them regularly. A restaurant or a hotel would be good - so long as you don't exceed the budget by even a penny.
In case of emergency
If you find yourself in a tight spot financially, and have kept money in the company, you can withdraw it as a director's loan. While you will hopefully not need this, it's good to know the option exists.
Conclusion
Leveraging your position as a contractor can prove incredibly profitable. Make sure you know your rights. With the benefits mentioned above, you can end up earning considerably more than the equivalent permanent employee in the long run. Speak to your accountant.
Do you know of any other smart financial moves a contractor could make? Let me know!
I may get commissions for purchases made through links in this post.
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