As a director of a company, it is your responsibility for keeping in check the company finances, regardless of whether or not you appoint an accountant.
Understanding your financial obligations and requirements is the first step to organisation and a sound ability to taking care of your finances overall. Without this, your administrative burden can get the better of you and running your own business suddenly loses its perks.
Those enjoying the humdrum of permanent employment are usually only considering basic financing such as incomings vs outgoings, holiday planning and rainy day funds. As a limited company contractor, you will also need to consider the above as well as a variety of tax calculations, business expenses, and all sort of planned and unplanned time off as well.
There are a number of reasons to which you might need time off work. One of the reasons you might have started contracting was so that you could take holidays more freely and enjoy more time for hobbies or friends and family. As well as budgeting for this favourable step out of work, you will also need to consider the less appealing possibilities:
The good news is that you will have the freedom to adjust how you are paid, so you can take 11 months of salary over a 12 month period to account for a holiday, so you still have a regular income regardless. When it comes to the unplanned absences such as illness, medical insurance is a consideration worth having.
You will also need to complete and submit a company tax return and self-assessment tax return as well as take into account relevant tax legislations such as the intermediaries’ legislation, commonly known as IR35. With regards to IR35, it is advised to always pay yourself a market rate salary plus dividends thereafter.
Budgeting for these is important to ensuring you always have the funds to cover them. Good organisation will also ensure taxes are paid correctly and your annual returns are kept accurate.
In general, contractors operating through their own limited companies tend to enjoy greater pay and can benefit from the flexibilities of payment methods and tax offsetting for better finance management. Remember you should always keep a good cash buffer in the business for rainy days and unexpected bills, remain organised to prevent avoidable surprises and never take out more than you can afford to.
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