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Whether you’re a sole trader or a contractor, managing your money is one of the most important things you can do – not only for the present, but also to prepare for the future, especially when you stop working. Financial planning for the self-employed means considering pensions, taking out dividends, sorting out your taxes, etc.

As contractor accountants, Gorilla Accounting focuses on delivering the best services to all our clients and helping them manage their accounts. Today we’re going to take a look at how to create a financial plan that works for you.

Have an Emergency Fund

When it comes to your finances, you don’t want to be taken by surprise, so make sure to have a plan in place in case something happens. The pot can be there before you even leave full-time employment, and it can be prudent to keep building it up when you start working for yourself.

Having savings can help you feel more at ease when you’re self-employed and can be the difference between sinking or swimming if work dries up or if clients don’t pay on time. You should aim to have enough saved for six months of expenses, be it your day-to-day costs or business expenses.

Emergency funds are also great to keep you from taking on jobs you don’t really want to accept since you can afford to look for different gigs.

Get Insurance

Both contractors’ insurance and life insurance are crucial when you’re self-employed. Not only can they provide peace of mind, but they can help if you experience a drop in income – and help your family if something serious happens.

You should account for contractors’ insurance when creating a financial plan as it’s a necessary cost if you want to safeguard your business. While we always hope for the best, sometimes clients may make claims against your business, your premises may flood, or you could have an accident that means you cannot work.

Having insurance like professional indemnity and public liability can keep your company afloat if the worst happens, since the policies can cover costs from third-party claims or natural disasters, for example.

Income protection is equally important. While you may think you don’t really need it, it’s become clear that things can change at any moment, as we’ve seen with the pandemic. If you find yourself unable to work, be it because of an injury or long-term illness, for instance, you won’t have any income coming in since you’re not employed and don’t receive sick leave.

Covering your expenses and your daily costs becomes downright impossible without a system in place to help when you need it. Income protection insurance can be the right solution for you – it covers your outgoings until you can go back to work and overall helps you protect your livelihood.

Diversify Your Contracts

An excellent way to ensure that you don’t run out of work is to have several projects going on at once. It may take up more of your time, and you may have to stay disciplined and organised, but it can help in times of uncertainty. Consistent work from one or two clients is good, but relying solely on that can backfire if they decide to stop working with you.

With a diverse portfolio, you won’t have to struggle to find new gigs even if you lose some income. A larger client list will also help you continue growing your reputation and assist greatly in getting your brand name out there.

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Consider Dividends

Another thing that contractors should think about is dividends. This applies to limited company owners, not sole traders, as only self-employed individuals who run a company can pay themselves with both a salary and dividends.

Dividends are what’s left after the company has paid all business expenses, including corporation tax and VAT. You can either keep these excess profits in your company’s bank account or pay them to shareholders. You don’t have to pay National Insurance contributions on dividends, which means these types of structures can be more tax-efficient.

If you’re a sole trader looking to set up a limited company or want to start your self-employment journey by immediately becoming a company director, we can help. As limited company accountants, we’ll work with you to figure out the right balance between wages and dividends so you can boost your take-home pay.

Speak to us for more information – a member of the Gorilla Accounting team will be on hand to answer your questions.

Track Your Expenses and Transactions

Staying on top of all your expenses allows you to budget better, which is crucial for contractors. Make sure that everything is recorded and use that to guide your financial plan.

This is easier than ever with FreeAgent bookkeeping software. This tool, which is also Making Tax Digital-compliant, allows you to keep track of all your business transactions, receipts, invoices and expenses in real-time, allowing you to manage your accounts from anywhere – and from any device.

This means that if you’re on the go, you can simply open the app on your phone, check your account and use that information to make quick decisions.

Consider IR35

The intermediaries’ legislation, including the latest update introduced in the private sector, impacts the jobs self-employed individuals are willing to accept. If certain contracts are inside IR35, it’s natural for contractors to hesitate before taking the plunge.

So, as a contractor, you’ll want to take IR35 into account when choosing work.

After all, if you intend on offering your limited company services, you must be aware of your financial obligations and plan for that. Confused about IR35? We’ve broken down this topic in our “What is IR35?” page to help you better understand the impact this legislation will have on your business.

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Get a Company Phone

This may not be the first thing that comes to mind when you’re thinking about financial or tax planning tips, but it can help you save money.

As a limited company owner, you can purchase a phone for your employees – including yourself – and have it as a tax-free benefit. You’ll even get corporation tax relief on this. The best thing about this is that you can use the phone for both business and personal purposes.

With our “Limited Company Expenses: A Complete Guide” article, you can see what else you can save money on.

Pay Into Your Pension

One thing you should consider as a self-employed individual is to start paying into a pension scheme as soon as possible. When you’re your own boss, you don’t have an employer enrolling you into a pension scheme, so you have to do it yourself if you want to plan for retirement.

It can be hard to make regular contributions to your pension because, as a contractor, you don’t have a steady or consistent income stream, which is why you must start building the pot as soon as you can.

For 2021/22, the state pension increased by £228.80 a year, and the lifetime allowance (the amount you can save into a private pension before having to pay a fee) will remain at £1,073,100 until 2026. You can also make SIPP contributions from your company – in fact, you can pay up to 100% of your earnings into your SIPP up to £40,000 a year providing you have no other contributions in that tax year.

If you’d like to learn more about pensions, check out our article “Top Money-Saving Tips to Help Contractors Save for Retirement”.

Best Pension for Limited Company Director

What is the best pension for the self-employed? This is an issue that many contractors wonder about, and it will depend on your particular situation. As a self-employed individual, pensions can be a complex matter, but we can help at Gorilla Accounting, so you don’t have to stress about planning for the future.

We’ve partnered with Penfold to provide you with a pension that works for company directors, sole traders and freelancers. Penfold does it all for you and offers a wealth of benefits designed to make your life easier, like providing expert support and advice and a 25% government bonus on every contribution.

Setting up your pension will take just a few minutes, so even if you’re busy, you still have time to make those all-important financial planning decisions.

Get the Best Tax Advice

If you run your own business, you understand the importance of good financial planning tips for contractors. At Gorilla Accounting, we have an expert team on hand dedicated to delivering the best financial services to our clients. Want more information? We’re happy to help, so get in touch with us and we’ll answer all your questions!