Over three million Brits are believed to work as sole traders, and there are plenty of benefits to doing so. Not only can contractors largely set their own priorities and schedules, but they also have the benefit of experiencing different types of work. However, with financial considerations such as tax obligations and pension payments to think about, it can also be a headache. Here are some of the main ways that contractors can avoid these problems.
Set up a pension
As a regular employee, it’s likely that you’ll have your pension looked after for you by the business that employs you. In fact, most employers now legally have to enrol you into a pension scheme – so you’ll have at least some protection, even if you have to cede some salary voluntarily as a personal top-up contribution. However, for contractors, this isn’t usually an option.
You’ll need to take out a self-employed pension to ensure that you’re covered for retirement, and this can be a hassle. When working out your rate, then, ensure that you add on say 4% or 5% – or potentially even more – in order to cover what your employer would otherwise be contributing if you were a regular employee. That way, you’ll know you’re covered.
Sort out your taxes
You’ll also need to pay your own taxes to Her Majesty’s Revenue and Customs (HMRC) rather than have your employer do it – and this is something that can cause a headache when self-assessment time comes around. Expert accountancy advice for contractors might be worth investing in, and it may also be worth reading up on the differences between sole trading, limited companies and umbrella companies in order to find the structure that’s right for you.
Keep good records
No matter what legal structure you opt for, you’ll always need to ensure that you have the right records in place. There are all sorts of scenarios in which you may be asked to submit records: if you receive a challenge from HMRC, for example, then you might need to prove your allowable expenses with old receipts. If these are kept around the house in everything from empty biscuit tins to bedside tables, then they’ll be hard to find! Instead, why not invest in a document wallet to keep them all together?
Working as a contractor brings with it a whole host of advantages, and sole traders up and down the country and in all sorts of sectors do it for the freedom, high earnings and tax advantages that it can bring. However, as this article has shown, there are also downsides – especially when it comes to getting your finances in order. Whether it’s paying your taxes on time every year or simply ensuring that you have all of the relevant documents you need to hand whenever they’re required, there are lots of obligations you need to meet in order to make sure that your financial management doesn’t start to impact your business.