Although the average contractor in the UK earns an impressive £5,414 more than their employee counterpart, this gain comes at the cost of bearing greater financial responsibility.
From unpredictable cashflow to calculating tax contributions. To ensure financial stability and security, contractors must approach their finances with careful planning, preparation and organisation.
Below, Umbrella Broker share our top tips on how contractors can get ahead of the game when it comes to managing finances in 2019.
Be Savvy with your finances
Streamlining your finances into one handy app can save a lot of time, energy and effort.
Alongside the hundred and one other things contractors have on their plates, why let chasing down old receipts and manually filing in timesheets take up your precious time?
Savvy contractors can make their lives much easier by using accounting apps such as FreeAgent. Here, contractors can gain a complete financial overview wherever they are, at any time. Record your time into smart timesheets. Easily create, send and track professionally designed invoices and record expenses on the go with just one quick photograph.
Read more about how you can control your finances in less than 10 minutes a day with FreeAgent.
Budget wisely
Although the annual 31st January deadline for filing tax returns has now passed for another year, being organised with tax all year round is integral to financial success.
A good accountant can help take on tricky tax contribution calculations. But it is the responsibility of the contractor to set aside a sufficient sum of money from their income for tax and National Insurance liabilities. Don’t leave it until tomorrow, start saving for these costs today. Otherwise you may face a nasty shock when the tax bill arrives.
Limited company contractors need to reserve enough of their income to cover:
- Corporation tax – paid 9 months after the year end at 19%
- VAT – once a quarter, if registered
- Income tax, National Insurance and dividend tax – paid on the 31st January
Prepare for changes to IR35
Changes to IR35 legislation set out in the 2018 Budget will not be implemented until April 2020. This makes 2019 a great time to gear up and prepare for the new rules.
Under the changes, tighter tax rules applied to those working in the public sector are set to be extended to contractors working for medium to large private firms. That means that from 2020, larger firms and companies will take on the responsibility of determining whether contractors will need to pay higher rates of tax and National Insurance.
Contractors should make sure they are prepared and equipped for these changes. To ensure they do not fall under the scope of the new IR35 rules. After all, the average contractor can save a healthy £5,000 a year in taxes by making sure they are outside the scope of IR35 from 2020.
Account for new tax rates in 2019
Some good news for contractors is that from April 2019 key changes to tax rates and thresholds will come into action. This will increase the personal allowance and highest rate tax band.
In the UK (excluding Scotland):
- The personal allowance will be raised from £11,850 to £12,500
- The higher rate Income Tax threshold will rise from £46,350 to £50,000 at which you will be taxed 40%
- The additional rate of £150,000+ will be taxed at 45%
Income tax in Scotland will also change with the introduction of several boundaries:
- Starter rate: £11,850 – £13,850 will be taxed at 19%
- Basic rate: £13,851 – £24,000 will be taxed at 20%
- Intermediate rate: £24,001 – £43,430 will be taxed at 21%
- Higher rate: £43,431 – £150,000 will be taxed at 41%
- Top rate: over £150,000 will be taxed at 46%
Contractors will need to forecast their tax contributions based upon these altered thresholds from April onwards.
Expect the unexpected
Successful contractors know that planning is key. As we enter 2019 we are faced with the uncertainties of Brexit and changes of IR35 legislation coming into play in 2020. Although contractors can’t predict the future, they can plan for the unexpected. From a longer than expected gap between contracts, falling ill or even just taking time off to recharge and go on holiday.
To avoid worry, insecurity and falling short in unexpected circumstances, it is important that contractors save for and build up an emergency fund. Having a reserve of at least 6 months’ worth of cash set aside will set contractors in good stead in the event that unforeseen circumstances become a reality.
2019 Loan Charge
Contractors have likely heard of the 2019 Loan Charge. A retrospective taxation targeting contractors who have used disguised remuneration schemes in the past. A complicated form of tax avoidance involving contractors being paid in loans.
Although they may not have been operating outside tax rules of the time, they have recently become the target of the tax authorities – under The Finance Act 2017 which contains measures which allows HMRC to target members of such scheme retrospectively, going back to almost 20 years.
Taxpayers who don’t settle or sign a settlement agreement could face a higher tax bill once the Loan Charge has been applied. The Charge has been deemed unfair by Lords so make sure to keep up to date with any changes that may happen regarding the Charge.
