If you are a contractor or are just stepping into the world of contracting – congratulations! Fluctuating income and financial concerns may be brewing, but don’t worry. Many freelancers and contractors have similar concerns and there are many ways to combat then. Ensure that you have a good accountant and be utterly compliant and protected from the start.
We’ve highlighted some of the major finance concerns contractors have voiced – and how to solve them.
Deciding between hourly and daily contract rates
When you start contracting, you’ll need to firm up your pay rates. There are two main pay rate structures: hourly rate and daily rate. Both have their pros and cons.
Daily rate is often used to give one rate for a ball pack ‘day’s work’. A day’s work can be interpreted to be anything from 6 hours to 10 hours so be sure to have a clear contract which stipulates the expected working hours.
Beware, however, that some companies will expect a lot from one day – or those days might be excessively long. Have watertight terms of engagement before agreeing to any amount of work.
Hourly rate can be used when projects are shorter – or do not have a specific end date. Employers are usually happier with an hourly rate for lower priced services, or will agree a cap on the number of hours to be a worked a week. Hourly rate is great for ongoing retainers or project work – such as marketing, design or consulting.
Going from permanent to contracting at the same company
Whilst there are no laws against contracting to your previous employee, you may need to check your employment contract or their internal policies.
There may also be issues if your old company does not want to pay out more than it did previously, for your services. This may require some negotiation – but remember that you are now liable for paying your own tax and expenses. Take this into account.
IR35 compliance concerns
Another challenge for contractors is IR35. What is IR35? IR35 is tax legislation designed to prevent tax avoidance by workers supplying their services using an intermediary, such as a limited company, whereas the workers would be an employee if the limited company was not used. Using an intermediary is also called ‘off payroll working’.
The off-payroll working rules are in place to make sure that where an individual would’ve been an employee if they were providing their services directly, they pay broadly the same tax and NICs as an employee.
IR35 means that if you choose to do that, you’ll have to pay a higher rate of tax as a ‘disguised employee’.
If you’re concerned about the tax implications of IR35, check in with your accountant for the most up to date advice.
Taking time off for holidays
During a contract, it’s unlikely that you’ll be able to take more than a week off. Any time you take as holiday will most likely be added to the end of the contract, so be aware of this when booking in future work. There are no set rules for booking holidays as a contractor. Ensure that you have discussed the potential for holiday days with the company you are working with – you may even wish to include this in your contract. Of course, if you are aware of a holiday at the conception of a project, it is a good idea to inform your client.
Negotiating pay and contracts
You may find clients try to use the cost of equivalent employees as a benchmark for what they are happy to pay contractors. This does not work as you are not an employee, you’re a specialist in one key area, your contract has defined outcomes and you get no employee benefits.
Think of the annual salary you would be aiming for and calculate the ideal day rate or hourly rate required to reach your goal. E.g. if you base your rate on working 200 days a year and you know exactly how much you’d like to take home after tax – divide that annual amount by 200 days and add 20% to cover your tax liabilities.
Pay is only one part of the contract. It is important to also think about how you will take time off for holidays, requirements for insurances, tools required for the work, flexibility of working hours, access to resources to support your work etc.
Contracting is an exciting and, at times, lucrative way to make a living. If you can cultivate a good reputation and a large portfolio, it could very well see you through to retirement. If you have financial concerns before or during your contracting, always ask your accountant for advice.
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