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How will I get paid? Financial planning considerations for contractors.

08 November 2021

By Gavin Hills

How will I get paid? Financial planning considerations for contractors.

We meet many job seekers who like the idea of contracting but don’t know where to start. There are many emotional and practical barriers professionals put in their own way to stop them making the leap, some more justified than others. Perhaps the fear we hear voiced the most, is concern about not being able to meet day to day financial obligations without the security of a monthly paycheck. It isn’t for anyone, but more often than not, a small amount of financial planning and organisation will make sure basic cash flow doesn’t become a big issue.

This is where our very own Finance Director, Gavin Hills (aka Carrington West’s “Dad”) can offer some pearls of wisdom. Massive disclaimer here – we are not offering financial planning advice, we’ll leave that to the professionals, but here are a few tips to point you in the right direction if you are considering becoming a contractor.

Gavin, not everyone loves a spreadsheet as much as you, so what is the best first step for someone considering contracting?

I’d have to say you start with some research and a great place to start is with our amazing recruitment consultants. Find out what sort of roles are available and what sort of rates you could be getting as a contractor. These are often more than you’d get for an equivalent permanent position, so it will certainly seem like an attractive proposition from the start.

But, contracting is not always guaranteed. The next step would be to start planning and budgeting so you don’t have issues when you are not working. You can sometimes end up with a few weeks between roles so make sure you plan for this at the outset, put some money aside each week/month to cover periods where you aren’t working either through choice or circumstances.

Can you briefly explain IR35?

Ha! That’s a tricky one, but maybe I could summarise it as -

‘if someone looks like an employee, acts like an employee, then they should be taxed as an employee’ - even if they are operating via a limited company (Personal Service Company (PSC)).

IR35 is there to make sure everyone pays tax fairly, but the flip side is it also protects workers. It makes sure that employers must pay the full range of benefits to a worker (sickness pay, pension contribution, maternity/paternity leave, holiday pay etc.) if the job they are doing is the same as permanent employees.

Importantly, all contract/temporary positions will need to be assessed as to whether they are ‘Inside IR35’ (employee) or ‘Outside IR35’ (B2B consultancy). If you are considering becoming a contractor, you need to make sure you are aware of what is expected from you if a role is ‘Outside IR35’, as you will also need to remain compliant.

Talking of tax, what’s the best way for a contractor to plan for and manage tax payments?

The simple answer would be ‘pay what you owe’ ! It may seem obvious but there is no shortcut and a common sense budget will help you plan and be prepared for tax bills.

As with anything to do with Tax and HMRC is there are a number of considerations to ensure you organise your finances properly. It does depend on how you are contracting.

If you’re working PAYE either directly through a recruitment agency or via an Umbrella company, then it should be pretty straightforward as this should all be dealt with at source. The only thing to look out for here is you tax code and if it differs from the standard code (currently 1257L) or is on a week 1 or month 1 basis. If this is the case, then you should talk to HMRC to find out why.

If you are operating via self-employed CIS or a limited company then the best advice I can give is to get a reputable accountant. Some of us might be grey and boring but we all spend a long time training for these very situations!

We’re coming up to Christmas, not only is it an expensive time of year, but often there is a period of time where businesses close, so even if someone is willing to work, they may not be able to. How should contractors plan for this?

It certainly is and it is important to plan how you are going to cover this period and indeed any holiday you want to take throughout the year. Once you’ve worked out how much time you have, need or want to take off, how this is covered depends on how you are engaged:

·        If you are PAYE direct through a recruitment agency, you will likely be accruing holiday, usually at about 12% of your gross pay. You just need to remember to request this to be drawn down.

·        If you are working via an Umbrella company you often get the choice to either have your holiday paid out as it’s earned or accrue it in the same way as an agency PAYE. It is important to make sure you know which of these options you’ve signed up to. Talk to your Umbrella provider to find this out.

If you do have this paid each week, and this would be case for all limited workers as well, you will need to plan for holidays and actually put 10% or so aside to cover holidays.

What happens if contracting is not for me? How easy is it to wind down and go back to a permanent job?

Normally this would be pretty straightforward. As an employee of either an agency or an Umbrella company, you will just need to get your P45 and present this to your new employer.

The only time it gets a little more complicated is if you are working via your own limited company. You will need to pay the appropriate taxes over to HMRC and then work out the best was to extract any remaining funds. Once again, your accountant will be able to help you manage this.

Where do recommend people turn to for further advice?

I would start by contacting a recruitment agency to start your research. They will be able to explain how you are likely to be engaged (PAYE, Umbrella or Limited).Once you’ve found this out there are plenty of websites that cater to contractors that can help explain all of the various options in more depth.If you do start thinking about working via a limited company, talk to an accountant and get some advice on how to go about this.

About the author

Gavin is Carrington West’s Finance Director. He has 20 years of experience in both practice and industry, across a range of sectors include FMCG, property, classified advertising, farming, retail and recruitment. For more information on our contractor support services and IR35 resources please visit our website.

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