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10 personal finance tips freelancers & contractors need to know

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.

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. Get it right, and you'll strike a work-life balance the envy of many.


The biggest drawback of being self-employed is the worry of being unable to work, right? Not anymore. With more and more insurers offering competitive rates for the self-employed, Income Protection insurance will cover you for periods of sickness. 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.)


After years of bad press, pensions are once again a financial must-have. New flexibility to draw down cash and tax breaks make a pension central to your financial planning. You can transfer funds direct from your company account to a pension scheme to reduce your corporation tax bill, and if you have retained profits you can carry forward unused pension allowance – making your pension one of the most tax-efficient ways to pay yourself.


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.


Spending money on childcare at an OFSTED-approved nursery? Using vouchers to pay for your childcare instead of paying out of taxed-earnings could save you hundreds - even thousands – a year. Watch out, though, as these rules are changing.


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 £10,000. A tax-free income for them is an allowable expense for you.


If you think freelancers can’t get mortgages, think again. While high street banks aren’t always welcoming, there are specialist brokers for sole traders, contractors and company directors. Many providers are happy to lend against earnings from salary and dividends, and some will lend if you have less than three years’ worth of accounts. There’s especially good news for contractors with deals offering up to five times annualised contract rates at high street interest rates.  Know where to look, meet the affordability criteria, and you can find a mortgage that’ll be the envy of any employee.


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. Never forget, though, this cash is still an asset. Those with limited companies should consider using a business savings account – a great way to make the money 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.


Pay yourself from company dividends and an HMRC investigation is a risk. Mileage logs, expenses claims and records of contract negotiations can all help confirm your IR35 status, even so, an enquiry is rarely easy. 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.


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.)

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.


Happy is the contractor who is free to pick and choose their clients. Six months’ worth of savings means you don’t have to rush into the first contract that comes along and can hold out for more profitable opportunities. Use your funds to build an investment portfolio: you can save up to £15,000 per year in an ISA (and up to £4,000 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!

This article was published in our Guides section on 02/10/2015.

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