Advice for handling your finances as a contractor

The possibility of working more flexibly and for oneself continues to attract more people, as a result of which there are a growing number of contractors in the jobs marketplace. However there are also plenty of jobs for contractors, as the Confederation for British Industry (CBI) found in a recent survey. According to the CBI, the business and professional services sector has experienced rapid growth since 2006 and prospects for oil and gas contractors remains strong. While this is good news, it is also the case that HMRC continues to target contractors, in search of those it believes are operating tax avoidance schemes. It’s therefore now more important than ever for contractors to put their financial affairs in order.

As it is, contractors already have a lot of financial tasks to undertake, besides calculating and paying the correct amount of tax on their income. There are outgoings to record and it is essential for them to know which of their expenses are taxable and which are claimable. There may also be VAT calculations and returns to prepare and a range of insurances or pensions schemes to handle. Annual accounts also have to be produced, based on records of invoices issued and payments received and these must be made available for inspection by HMRC if requested.

For many contractors the burden of the administration and financial management required can be quite time-consuming and because HMRC can be very demanding these tasks must be completed accurately and records filed on time. Increasingly, in order to concentrate on their core business and on marketing their skills, contractors have been turning to umbrella companies for help with their financial administration. In fact, umbrella companies offer an excellent alternative to struggling with financial matters and because they are experts in their field can often save contractors money by reducing the level of tax they pay and increasing the expenses they receive, all while acting entirely in accordance with UK tax legislation.
How umbrella companies work
When a contractor signs up with an umbrella company they hand over their financial administration in the knowledge that there are payment solutions available to suit their particular area of business. Some contractors prefer to be paid on a weekly or monthly basis, while others are content to wait until their client or agency has paid the umbrella company on their behalf. The umbrella company then pays the contractor, usually on the same day. These companies provide help with your tax calculations and in many cases will also do all the necessary paperwork, including credit control, invoicing, payroll management, issuing payslips, P60s and P11Ds as necessary. They have access to a number of different types of insurance schemes and can offer optional company pension and income protection benefits.

Finding a trustworthy umbrella company is essential and contractors are strongly advised to look for one that is approved by the Association of Employment Management Companies (AEMC) and has a strong track record in providing a PAYE service that is fully HMRC compliant.