While becoming a contractor serves many benefits, like becoming your own boss and working suited hours, there are many tricky situations that come along the way. Especially with the financial side of things.
We’ve created a list of the most common mistakes we see contractors make when it comes to their finances so that you can stay clear of them and run your business worry free.
1. Being unrealistic with annual earnings
When estimating expected annual income, contractors usually forget to consider a few key factors.
For example, say you estimate that you'll earn £300 per day, how much do you think you’ll earn a year? We see a number of contractors multiply their estimated daily earnings by 5 working days, and then by the 52 weeks in the year, but this isn’t realistic. Make sure you take into account your holidays (8 public holidays plus your own – around 20). That’s a month of earnings gone already, and that’s without considering sick days and time between contracts.
Let's break this down properly to give you a closer look. £300 x 5 days x 52 weeks is £78,00, and that's before tax.
First of all, the number of sick days people take in the UK is an average of 4.1. Add this to your 8 public holidays plus your own 20 days of holiday. That's 32 days (4.5 weeks) without earning a single penny.
Let's do that calculation again, but this time, with a realistic amount of weeks you'll be working within the year. So, 52 weeks minus the 4.5 weeks (that we calculated as the average time people take off work within a year) is 47.5. Meaning the calculation to estimate your annual earnings should look closer to the following.
£300 a day x 5 days work in the week x 47.5 weeks you'll be working is £71,250, which is near enough £50,000 after tax.
Note that this best case scenario as well, if you take into consideration the possible time between contracts, you'll be taking home even less.
Being realistic with your earnings will help you with planning for the future and help you to control your expenditure.
2. Missing out on tax deductions
Surprisingly, many contractors are unaware of all the expenses they can claim and therefore lose out on potentially hundreds of pounds each year.
On the other hand, there are contractors that decide they are either too busy to properly record and claim their expenses or simply decide the amount they are able to claim isn’t worth the effort. Why wouldn’t you want to claim money that's yours? Even though the amounts may be small, it all adds up. Here are a few examples of expenses you may be able to claim for.
- Rent for business premises
- Utility bills
- Hotel rooms
Depending on your circumstances, there are so many expenses that you might be eligible to claim for. You can refer to the HMRC guidelines for a list of the expenses that can be claimed.
At HL&W, we advise our clients on the expenses they are eligible to claim for, meaning you’ll have some extra money being deposited into your business. Who wouldn't want extra money to reinvest into their business?
3. Paying too much tax
We’ve seen a fair number of contractors miss out on tax breaks, and some pay too much National Insurance – occasionally it’s a combination of the two. You might be thinking, "but I can just claim it back?" However in reality, a lot of people don’t bother to claim a refund, or they simply forget. This leaves a lot of people losing out on hundreds, if not thousands of pounds a year that could have been paid straight into their bank.
This can be easily avoided by hiring a qualified accountant like HL&W, we ensure our clients are tax-efficient to help minimise tax liabilities.
4. Getting caught inside IR35
The IR35 tax legislation was put in place to combat tax avoidance by workers supplying their services through an intermediary (such as a limited company) And being caught inside IR35 isn’t something you want - the consequences can involve having to pay fines. So, make sure you know the ins and outs of IR35 in order to stay compliant.
As part of our accounting services at HL&W, we meet your IR35 needs, guiding you through IR35 regulation to make sure you don’t pick up any heavy, unwanted fines so you can run your business worry free.
5. Doing your own accounts
A lot of contractors believe by doing their own accounts, they’ll save money. This is very rarely the case in the long run. Miss a deadline, make a typo, type in a wrong number and you could find yourself in some serious problems. Luckily, this can be easily avoided simply by hiring a qualified accountant. Not only will you be able to relax knowing everything is being taken care of, but you won’t find yourself in any sticky situations where you find yourself wasting valuable time trying to fix the issue.
If you’ve made one of these mistakes as a contractor and want to ensure it doesn’t happen again then take a look at look at what we can offer you. We support contractors by providing the financial services you need to succeed. If you have any queries then please feel free to contact us, we’d love to chat!