Financial planning tips for IT contractors
Posted May 7, 2009
With a new tax year to take advantage of, there has never been a better time to spring clean your finances.
With many household budgets now tighter and low interest rates making a dent in the return from savings, what can you do to ease current pressures and make the most of your contract income?
Preempt higher taxes in 2010/11 tax year
Given the obvious strain on the public finances we already know that company and personal tax is set to rise next year.
2009/10 could be the year to bring forward plans to draw out retained profit, pay yourself a bonus or engineer a better trading year than you will experience in 2010/11.
Pensions provision is always an efficient way to get money from company into personal hands.
In most cases contractors can transfer virtually all of their income, tax free, into a pension although the budget has clipped the wings of the highest earners and they can now only invest £20k and be certain of higher rate tax relief.
Starting to drip feed higher amounts into a scheme now could help you to exploit depressed valuations on the equity and bond markets In particular US, emerging markets and smaller companies in general look set to prosper as the worse of the bad recessionary news is now out in the public domain.
Cutting down on unnecessary spending
The first and most simple step is to cut back on your spending. Cut those empty expenses that gnaw away at your financial security and you'll be better placed to ride out the tougher economic climate.
One quick and easy way to save money is to make sure you have the best deal on your utilities. For the purpose of comparing utility bills we have found that sites like uSwitch can give a fair indication of the best deals available.
Review expenses such as mobile phone bills and broadband packages to ensure that you are making the most of your current tariff. If you don't use a monthly allowance for text messages for example, then switch to a lower rate - a number of small savings can soon add up.
Clean up credit card debt
With banks keen to repair their balance sheets you will probably find that their margins on debt will have jumped in the last few years. If you're someone who doesn't clear their credit card balance in full every month, then shopping around for a better rate is advisable.
Even though base rates are at a 300 year low you wouldn't think so by looking at credit card and personal loan interest rates so try to pay off as much of this debt as possible and avoid using your credit card for day-to-day expenses unless you can afford to pay the balance each month.
Are you paying as little as possible for your mortgage?
As borrowing becomes trickier, going to a broker can make good sense and it's no surprise that enquiries to the UK's Independent Financial Advisers are up 50%. Whilst a broker can't magic great rates out of the air, the can help hunt out the best schemes for your circumstances.
The current market presents a very confusing picture, where tracking down the best deal takes time and a keen eye to check for small print and hidden charges. Those good rates that are around are being withdrawn with very little notice.
Although specialist contract based mortgage underwriting has been looked at by various lenders who were considering whether to drop it, thankfully we've been able to convince them that using your contract rate alone still has a place and that contractors represent a sound credit risk even with a slowdown in the wider economy.
Borrowers with mortgage schemes due to end in the next 4 to 5 months who have relatively small amounts of equity in their property could benefit from looking at options now, securing current deals ahead of any further tightening of lending criteria or greater falls in house values.
Explore the merits of flexible mortgages that allow over/underpayments and payment holidays to preempt potentially lower earnings or times between contracts and if your current mortgage rate comes to an end and we are unable to find you a sufficiently low rate due to the current market circumstances then we can look to extend the term temporarily to reduce monthly payments.
For more information, or to find out the latest mortgage deals, read our guide to IT contractor mortgages.
Get the most from your savings!
Unfortunately, savers have been one of the major victims of the credit crunch, with interest rates at crippling low levels. You will be lucky to get 3% on a High Street savings account now and this situation looks set to continue well into the new tax year.
Cash ISAs are also suffering from the low interest rates but all is not lost. New freedom to transfer your cash ISA into equities could help you to maximise the long term potential of your savings without losing the valuable tax wrapper.
If you can afford to leave your savings for a period of around five years or more then you could see significant growth in an equity and shares based ISA although there is a level of risk involved. Despite its vulnerability to any volatility in the market, the potential for growth is much higher than a cash ISA so you have to weigh up the risks depending on your individual circumstances.
It is advisable to keep some money in cash in order to cover any periods in between contracts or if you fall ill and are unable to work. However, investing in Income Protection insurance will help to minimise your reliability on savings and free up some money to invest in equities for long term capital growth.
Remember in the 2010/11 tax year, you can invest up to £10,200 tax free (up to £5,100 in cash) into an ISA which would give your savings a significant boost and ensures that you take home more of your hard earned cash.
Don't put all your investment eggs in one basket
Too many investors are solely focused on one asset class.
Diversification is the key to a solid investment strategy regardless of whether we're in times of stability or volatility, so keep a level head and make sure your investments are giving you the widest possible exposure to a variety of different world stock markets and that you have exposure to commercial property, bonds and also gilts.
You should try to ensure that whatever happens to one particular part of your portfolio, you will have other investments that will counter the effects and level out any volatility.
Drip feeding your investment, referred to as 'pound cost averaging' is often an effective way to reduce the risk as you spread it over a number of small deposits. This allows you to minimise the effect that volatility in the markets might have on your ISA and other investments as you are avoiding piling all of your money in on the same day.
You can find out more in our overview of IT contractor financial services.
Seek expert advice
When it comes to your finances, don't bury your head in the sand. It's all about being proactive rather than reactive and expert advisers can help you to make informed decisions to better your financial future and make the most of your contractor income.
About the author
Tony Harris is MD of FreelancerMoney, Independent Financial Advisers that specialise in offering financial solutions tailored to the contracting community.
You can find out more about products tailored to the needs of IT contractors in our contractor financial services guide.
- Professional Indemnity Insurance - Essential cover from Hiscox
- Helix Management Ltd - Up to 90% retention. Same day payments
- Parasol - the UK's favourite umbrella company
- Qdos - IR35 experts - Providers of low cost contractor insurance
- Contractor Finance - up to £30,000, when you need it
- Umbrella Company - 12,000 contractors can't be wrong!
- SJD Accountancy - UK's largest Accountants to Contractors
- Together we're stronger! - Join PCG, representing contractors
- ClearSky Accounting - specialist support for contractors
- Free IR35 & Tax Review - Call ICS on 0800 195 3750
- InTouch Contractor Accounting - Clients love our personal service
- Contractor Mortgages - Based on your daily rate alone