Managing Finances as a Ltd Company Contractor

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.

 

• Taking Time Off

  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:

  • Sickness - with no employer sickness policy to help keep your funds going when you get sick, you will need to account for both short term and possible long term illnesses for both you and your family to whom you may need to provide care.
  • Retirement – at some point you are going to sack it all in, but with no company pension to boost your savings, you will need to make further considerations on how you will raise these funds.
  • Lulls – there is bound to be times in your contracting career when things just aren’t happening, sometimes the market takes a downturn or you just find yourself in a spot of bad luck. You will need to ensure you have a decent rainy day fund to get you through these tough times.

    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.

     

• Tax Feelings of animosity bubble up from the sound of it. Permanent employees are generally free from the joyous occasions provided by filling tax returns and their taxes get done for them before they even get a payslip. For limited company contractors, there is an array of personal and business taxes to get your head around and keep on top of:
  • Income tax
  • Employees national insurance contributions
  • Employers national insurance contributions
  • Corporation tax
  • VAT
  • Dividends tax if you are a higher rate taxpayer

    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.

     

• Expenses There are a multitude of personal expenses that need dealing with such as mortgage repayments and phone bills and so on. With your own company however, you will need to keep on top of additional expenses, which is where good organisation really helps:
  • Travel and subsistence expenditure
  • Marketing costs
  • Business insurance policies such as Professional Indemnity Insurance
  • Equipment and running costs such as internet bills
  • Accountancy fees

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.