As a contractor, you'll need to budget for tax, insurance, professional fees, pension and for periods where you aren't earning such as holidays and sickness.
Here's your guide to budgeting for your limited company, from the experts at the UK200Group:
Contractors generally find that they earn more than their employee counterparts, but treat all your extra cash with caution when you first get paid, this money is not yours, but your company's.
You first need to remember that your limited company revenue is pre-tax, and so you need to hold a portion back for when Corporation Tax, Income Tax, VAT and potentially National Insurance Contributions (NICs) become payable. It isn't always easy to gauge exactly how much you should retain, but if you speak to the UK200Group, they can help you reach an accurate estimate.
From here on, it's recommended that you make deductions from your earnings to account for costs incurred throughout the year, including:
Holiday and sick pay: Running a limited company means making your own provision for time taken off for holidays and sickness. This could vary signficantly based on how much holiday you plan on taking, and your state of health.
Pension: Likewise, you have no employer paying into a workplace pension, so contributions into your own pension scheme is advised. Plus there are usually major tax savings when you make pension contributions.
Professional fees: Part of your budget should be allocated for professional fees. This includes accountancy and consultancy fees, as well as contract reviews and professional advice from solicitors. These may seem costly at the time, but this expert input helps ensure that over the long term, and if something goes wrong, you keep hold of more of your money.
Business and protection insurance: You and your company will need a range of insurance policies to help to protect both contractors and their earnings in the event of a dispute or mishap. There are numerous policies, which are covered on page 12 of the UK200 Freelancers & Contractors Group guide (see link below).
Travel and subsistence: Most contracts, especially those on a client’s site, require a lot of travelling. A lot of these costs can be claimed back as expenses.
There are several variables impacting the fees that contractors set aside for themselves. This needs to be measured, which is why the UK200Group offer financial planning for contractors as part of their service.
This extract was taken from the practical guide to 'Running a Limited Company'. It was reproduced with permission from UK200Group and written by experts in the UK200 Freelancers & Contractors Group. Find out more about the UK200Group here: https://www.uk200group.co.uk/
It's worth taking advice before you start work to ensure you set up and maintain your accounting records, including expense receipts, in the right way. Set up costs can also be tax deductible under certain circumstances. The experts from the UK200Group explain more:
As a contractor, you'll need to budget for tax, insurance, professional fees, pension and for periods where you aren't earning such as holidays and sickness.
Here's your guide to budgeting for your limited company, from the experts at the UK200Group:
