CONTRACTOR FINANCES

How to make your money work for you

There are very few industries or businesses that don’t have problems with managing their taxes but if you were to pick one sector that has it more complicated than most, and one group of workers that seems to be more targeted by HMRC than any other, it would be contractors and the contracting sector. Contractors finances are extremely complicated; from the managing of income initially, to taxing that income, to proving the income to banks and other financial institutions when it comes to loans, mortgages and other products. On this page we’ll take a very brief look at some of these areas:

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Invoices, Timesheets & Managing Your Time.

An essential part of life for any contractor is dealing with invoices and timesheets. Contractors will be working at hourly or daily rates, usually for unfixed hours so they need to keep a close record of the time spent on the contract so that they can bill the client at the end. This applies to all fee structures in contracting. If you are doing your contracting through an agency then the agency will almost certainly want you to get timesheets signed by both you (as the contractor) and by the client. It is a good idea to always do your own timesheets at the same time, both from the point of view of IR35 and for your own records in case there is a dispute or discrepancy of payment. Similarly, if you work for your own limited company or via an umbrella company, timesheets are equally important.

Hand in hand with timesheets will be the invoices. If you work via an umbrella company they will take care of invoicing for you and you don’t need to worry about it, but for everyone else invoicing is a big part of their paperwork. Invoices should always cover the hours worked, the rate per hour (or per day) and the total money owed. It should also list your company details, an invoice number and the date issued as well as when payment is due, the terms of that payment, VAT that is applicable and most importantly, how the money is to be paid (usually by giving bank account details.) Always remember to keep one copy for yourself and your records too.

Tax, National Insurance and Expenses.

Whereas people who work for permanent employees have their taxes and NIC’s handled for them, contractors (unless they are working for an umbrella company) will have to do it themselves. This means contractors need to be able to calculate and understand their own tax arrangements, their employer’s national insurance contributions, their employee’s national insurance contributions, and their corporation tax and VAT.  They are responsible for ensuring all of these are paid correctly and that the returns are submitted on time and in the correct way. And if they don’t want to deal with all that then they need to get a good contractor accountant who can do it on their behalf. This is usually advisable as there are all kinds of strict rules for limited company contractors which an accountant will be able to handle more efficiently and with more certainty of staying compliant. Expenses is one area which is particularly complicated. Contractors need to carefully work out their expenses relating to insurances, phone bills, equipment purchase or hire, accountancy fees, training and many more, not to mention the fraught area of travel and subsistence expenses. In short, an accountant is highly recommended!

Mortgages for Contractors.

If there is one particular area where contractors have really had it tough in recent years it is when it comes to applying for a mortgage. Because of the idiosyncrasies of contractor pay it has always been the case that high street mortgage lenders have been reluctant to issue mortgages to contractors. They view contractors as high risk, lacking a full time permanent employment position and often not able to produce three full years of accounts. When they have, on rare occasions, decided to offer a mortgage it has usually come with a sky high rate of interest.

Thankfully, as more and more people have started to work for themselves and the freelance / contracting sectors have grown and grown, the market has opened up to contractors and there are now a number of specialist providers who offer contractor mortgages. These contractor mortgages are backed up by lenders and brokers who have an understanding of the way contractors work and the way they structure their finances and they come with much better interest rates than contractors would find on the high street.

Retirement and Contractor Pensions.

Most people don’t have to think about retirement until very late in the game, because it is something their permanent employer takes care of as part of the perks of working for a company and getting a company pension. For contractors this is not the case and they need to force themselves to think ahead if they want to plan for a decent retirement.

In fact, if a contractor puts money into a contractor pension fund they will not only get the benefit later in life but will also be able to reduce their current tax bill at the same time. That’s because pensions now have a tax incentive that is there to encourage people to invest (so that they will put less pressure on the government funds later) and put more money into their pension. If you do it from a limited company there are double benefits as you also get to make savings on your corporation tax! Moreover, it can help with IR35 issues if you get caught out – pension money is exempt from the income tax you would be charged if adjudged to be within IR35. The more you put in, the less you will have to pay in backdated IR35 liability! The only thing to remember is that you wont be able to touch your pension until you are 55 at which point you will be able to draw out 25% as a lump sum. The rest can be drawn out annually  with limits, through an annuity  for a regular income or left as inheritance.

Mortgages for contractors

Capped Rate Mortgages for Contractors

Capped rate mortgages are tied to the standard base rate of interest but which cannot go ever upwards and which are capped so they will not go over a pre-set level of interest and repayment. As such capped mortgages offer borrowers more security as they know their...

Tracker Mortgages for Contractors

Tracker mortgages are mortgages in which the interest rate on the mortgage is set at an agreed level above the standard base rate. The mortgage then tracks that base rate religiously. Doing so means that such mortgages are often much cheaper than standard variable...

Variable Rate Mortgages for Contractors

When sitting down to try and work out what type of contractor mortgage will suit you it is important to ensure you know the ins and outs of all the different products you will encounter. Variable rate mortgages are very common and consequently it is essential that you...

Discount Rate Mortgages for Contractors

As if all the different types of mortgage products for contractors weren’t confusing enough, people who decide to opt for a contractor variable rate mortgage then have a number of further choices to make as to what type of variable rate they want. As we have seen...

Offset Mortgages for Contractors

With savers struggling to find anywhere to put their money in the current economic climate, it is unsurprising that offset mortgages have been rising in popularity over the last couple of years. Offset mortgages were first launched back in 1994 in the UK but for a...

What are buy to let mortgages for contractors

Buy-To-Let mortgages for people contracting are once again growing in popularity as the economy shows the first signs of recovery and people look to invest their money once again. But with banks and building societies still offering measly returns on savings, people...

Fixed Rate Mortgages for Contractors

Introduction The term ‘Fixed Rate Mortgage’ is self-explanatory - it refers to mortgages in which the interest rate stays fixed throughout an agreed term. They are a way for people to guarantee their mortgage payment remains the same for a specific period of time -...

Calculating how much you can borrow

Though it is best to use a mortgage calculator to get a guideline indication of how much you can borrow, you can also make the calculation manually if you are not near a computer. For any individual who is looking to secure mortgage funding, the amount that you can...

Lenders Who Offer Contractor Mortgages

Over the last few years contractors setting out to find themselves a mortgage had to brace themselves for long and tedious debates with their bank manager as to why they were a good investment and why they should not be shunted over to higher interest...