Contracting / Freelancing - 10 pitfalls to avoid
Get it right and contracting gives you the best of all worlds: flexible working patterns, uncapped income, tax breaks and an ever-growing network of contacts. There are, however, potential pitfalls - here are ten to consciously avoid.
- Allowing insufficient time to complete a project
Time is money and speed matters in business. However, don’t make promises you can’t keep or agree to timescales that
compromise your work. It’s better to politely decline an unrealistic deadline (door stays open) than accept the job then fail to deliver (door closes firmly).
- Not moving with the times
Stay current with technology, market developments and required skillsets in your line of work. Diversify, improve and think upskill to avoid becoming
- Failing to look beyond your current contract
There’s nothing worse than crash landing from a lucrative contract into a completely empty diary. Network, scour job boards and be alert to
new opportunities constantly.
- Understanding what you can and cannot claim as a legitimate business expense
Don’t assume that you can offset all your expenditure on business-related items against your tax
liability. Expenses and allowances are a complex area and it’s worth speaking with a specialised accountancy service to ensure you are fully aware of what is allowable.
- Not missing out on tax relief available to you as an individual
Tax relief such as Childcare Vouchers and pension contributions are available to you, even if you are a contractor / self-
- Making sure you have the correct business structure
The choice between self-employed, umbrella, limited company, off-shore etc. is a daunting decision faced by every new contractor.
Whichever business structure you opt for greatly affects how you get paid, when you get paid, the amount of paperwork involved, and the tax implications and allowances. Most of all, it can affect how much you get paid.
Speaking with an accountant who is well versed in this area is paramount to making the best decision for your financial future.
- Be wary of IR35
If you’re going down the route of contracting through a Limited Company, consider the impact of IR35 on your next contract. The tax implications of falling inside IR35
will seriously impact the amount of tax you have to pay.
- Being unprepared for Jan 31
Unless you choose to set up and work through your own Limited Company, the main chunk of your tax bill falls due on January 31, with an advance on the
following year’s estimated bill due on July 31. Putting away around 25% of each payment you receive will help you prepare for when HMRC wants its money.
- Forgetting you’ll need a holiday
Freelancers don’t get paid for taking two weeks off in the sun. Factor holiday time into your contract or be sure to put money aside for a
necessary break. Also, make arrangements to ensure your client doesn’t suffer any interruption in service. Apply similar considerations to potential health-related absences.
- Income shifting
There is legislation that seeks to deter you from deliberately shifting income to a partner in order to avoid tax. It’s there to ensure that wages or
dividends are legitimate and deserved, and not simply a way of diverting income from higher tax rates in your hands to lower tax rates in a partner’s hands. Again, this is where having an accountant on board is
important to help you stay on the right side of the rules.
This article was published in our News section on 01/09/2014.
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- Making Tax Digital for Landlords There's every chance that you are not yet aware of Making Tax Digital (MTD). However, if you are a landlord with rental income - (that's income, not profit) – greater than £10,000 annually then you should be. MTD is the biggest shake up to the UK tax system since the advent of Self-Assessment in the 1990s. And it affects you, from April 2020 at least.
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