Flexibility and freedom are two words that typically come to mind when you think of contract or part-time work. However, with flexibility and freedom, there is also more financial responsibility and risk to be considered. We sat down with Keith Brooks, Chartered Financial Planner at Aberdein Considine, to discuss in depth the key aspects contractors should be considering when they are looking at their own financial planning needs.
Firstly, thank you for taking the time to speak to us today Keith, with many of your clients being seasoned contractors, what are the key things from a finance perspective they need to be thinking about?
As a contractor or part-time worker, your income will likely tend to ebb and flow. Having an emergency fund with enough savings to cover three to six months’ worth of your essential expenses like car, mortgage or rent, utility bills, food…etc can help ensure you can pay your bills even during times of reduced income.
Are there other costs or taxes a contract worker might incur that they need to plan for to avoid an unexpected hit on their savings?
If you work through a limited company, outside IR35, first the company pays corporation tax on the company profits, then you take a dividend – which if you earn over the higher rate tax threshold is subject to personal income tax when you complete your annual self-assessment tax return. These taxes can take away a considerable portion of your income.
In these circumstances, how would you best advise the client to help with their short and long-term financial security?
Making pension contributions is one good idea, contributions made by your business on your behalf, would in some cases result in tax relief of 60%, as the worker would regain their personal allowance. This offers the immediate benefit of a reduced tax bill but also long-term benefits of an income at retirement or indeed from any age after 55 when you can draw pension benefits without retiring
When people are moving from a permanent job into contracting, what are some things they may not realise they will be missing out on?
Leaving employment could result in you giving up various employee benefits which you may not have considered and may have to fund yourself going forward such as Death in Service/Life Cover, Private Medical Insurance, Income Benefit if off sick, Employer Pension contributions etc.
The good news is that replacing these benefits could help you reduce your tax bill at the end of the year. If you have recently moved from an employed position to a contractor role, I would strongly recommend a full financial review to make sure you are not missing out on any benefits or tax reliefs.
Speaking of things like tax, are there key dates throughout the year Contractors need to be aware of?
Yes, especially for remaining compliant with HMRC, there are several key dates limited company contractors need to make note of. Paper tax returns have to be with HMRC by midnight on October 31st, while those that are filled out online need to be completed by midnight on January 31st. Significant penalties are in place if the 31 January deadline is missed.
It’s important to remember that this return is in relation to the previous tax year – 6th April to the 5th April. So, any tax planning such as pension contributions must be in done before the 5th April deadline.
Also, each year, all limited companies must prepare company accounts to provide to their members and shareholders. Normally the deadline for submission of these statutory accounts is 9 months from your accounting reference date.
Your Corporation Tax liabilities must also be paid within 9 months of your company’s year-end. At a tax rate of 19% it is important to plan well in advance to reduce your tax bill where possible.
Does the annual budget from the Chancellor stand out as a key date for the diary as well?
Yes, absolutely. The annual budget is announced in the Autumn to allow any new legislation to be introduced by the time the new financial year starts in April. It is important contractors are aware of any potential changes to deducting their own tax and national insurance from their wages each month. However, there is no exact date for this and workers in Scotland have their own Budget announced at the start of December and the tax rates and tax bandings are currently completely different to the rest of the UK.
In recent years the Budget has also announced changes around IR35 which has had a major impact for contracted workers.
Speaking or IR35, there are changes being introduced in April 2020, how will these affect contracted workers?
IR35 was the government’s first attempt at introducing measures to counter tax avoidance by the provision of personal services through an intermediary company, or personal services company (PSC).
The reforms will have the effect of transferring responsibility for determining whether an individual is a disguised employee from the PSC to the client end-user, where the client will decide whether the individual is impacted by the rules. The client will become responsible for deducting and accounting for income tax and NI via payroll. If they fail to do so, the consequences can be serious and expensive, with interest and penalties applying.
It is important to seek appropriate employment advice from an accountant to ensure that you are compliant and that you are being remunerated in the most tax efficient way possible.