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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.

1. PROTECT YOUR INCOME

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.)

2. MAKE YOUR PENSION WORK HARDER

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.

3. SAVE £1000s ON LIFE COVER

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.

4. SAVE ON CHILDCARE

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.

5. SPREAD INCOME AROUND THE FAMILY

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.

6. GET A MORTGAGE

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.

7. HOLD MONEY BACK FOR TAX

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.

8. PROTECT YOURSELF IN THE EVENT OF AN IR35 INVESTIGATION

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.

9. GET THE RIGHT BUSINESS INSURANCES IN PLACE

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.

10. MAKE YOUR MONEY WORK FOR YOU!

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.

Some Guides you may be interested in

  • Off-payroll working in the private sector - a contractors guide IR35 is a tax legislation used to distinguish between employees and genuinely self-employed contractors. Last month we compiled a comprehensive guide to IR35. Now, we take an in-depth look at how the ‘off-payroll working’ rules, introduced to the public sector in 2017, will be extended to medium and large-sized businesses in the private sector from April 2020.
  • Valid expenses you could claim as a landlord Are you a landlord? Maybe considering a new home, and letting out your current property? Maybe you’re working abroad for a while, and renting your home to make ends meet? Before you take the plunge (or even if you took it years ago), this article aims to help you make the most from your rental income.
  • A guide to expenses for Contractors As a contractor, working through your own limited company, one of the main benefits available to you is the ability to claim business expenses. Claiming expenses correctly can reduce your tax bill, it’s a vital part of running your company tax efficiently.
  • 7 reasons you could have the wrong Tax Code Your Tax Code tells your employer how much tax to take off your pay. What if your code is wrong? In the past 4 years, 1 in 3 employed taxpayers have been overcharged tax because their employer has received the wrong code from HMRC!
  • IR35 - A contractors guide for 2018/19 IR35 is a complex piece of legislation used to distinguish between true self-employed contractors and employees. As a contractor, it’s important that you have an awareness and understanding of IR35 to ensure that you’re paying the correct amount of tax and National Insurance. Here’s a definitive introduction to IR35 to help you understand how it works.
  • 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.
  • Contractors - LTD Company v Umbrella? What are the benefits for contractors of setting up a Limited Company vs Umbrella Company? Read our guide, see how much you could take home in each setup.
  • Capital Gains Tax on Rental Property (Buy-to-let) 2018 Whether it's primary residence relief, letting relief, or even the costs of improvement works, our resident landlord and property tax editor, Iain King has the information you need to reduce your CGT liability.
  • 14 Reasons why you may be due a tax refund Almost 1 in 3 PAYE employees may have paid too much tax. We have put together a list of 14 reasons why you might be owed money by HMRC.
  • Avoid paying too much tax on rental income Our resident landlord tax expert, Iain Rankin, has put together a great guide on how to reduce the amount of tax paid on income from your rental property

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