For the most part, contracting through your own Limited Company is great. You get to choose when, where and who you work for, along with your day rate. But while there are plenty of perks to contracting, there could also be a few bumps in the road to look out for.
Not appreciating how much running a business could cost you
When you were in permanent employment you may have travelled to an office, had your computer equipment taken care of, had insurance paid for on your behalf, and even maybe had a company car. But when you’re running your own Limited Company then all expenses are down to you. Here’s a list of costs to consider before starting your first contract:
Equipment – such as your laptop, tablet, mobile phone, etc
Office space and things you’ll need, such as a desk, heating, water, electricity, etc
Marketing costs and running your own website, if you have one
Training courses and future qualifications
Insurance
Taxes
Your work/life balance tipping too far one way
If you’re new to contracting or are working from home, you may be finding it tough adjusting to getting your work/life balance right. It’s normal to want to succeed in your professional career, and you’ll probably find yourself putting in a few extra hours here and there to get the job done, but it can be easy to slip into a pattern where your work/life balance blurs. One of the main reasons you chose a career in contracting was probably for the freedom it offers, so bear that in mind when you’re planning your time.
Be sure to schedule regular breaks, trips away, things to do in the evenings and time for you to enjoy things outside of work, to help keep the balance.
Not casting your client net far enough or networking
When you have a collection of clients who regularly provide you with work, it’s easy to forget that contracts aren’t always guaranteed, they can end abruptly, and that you shouldn’t rely on just a few clients to keep you afloat.
To combat this you could introduce yourself to a new client every month, share your portfolio and qualifications with them, and ask them to consider you for any new contracts they might have. That way you’re keeping your presence on the contracting scene fresh, and shows your willingness to step outside your usual client comfort zone. You could seek out new clients on LinkedIn, by joining discussion groups on contractor specific forums, or asking contracting colleagues if they’re able to give you their contacts.
If you’re used to only working on one contract at a time, consider your working week and whether you’d have capacity to potentially work on more than one contract. If you think there’s scope for this, try it out to see if it works for you.
Settling for lower rates and any contract that you’re offered
If work is a little slow or you’re not yet confident enough to charge your worth, you may be tempted to accept any contract that comes your way, or those that pay less than what you’d ideally charge. Whilst this could see you through a dry patch, continuing it for too long can be detrimental to your contracting career. If it’s not paying what you need or will be a positive addition to your experience and CV, then you should question whether it’s worth your time.
Know your worth by understanding how much your experience, qualifications and skillset can command within the industry, and ensure you charge the going rate. You can do this by researching how much other contracts are offering, and how you compare. Your location will also have an impact on this, as contracts offered in cities will usually pay more than those outside.
Always charge your worth! For a more in-depth look at getting paid your worth, take a look at our blog.
Not negotiating
Following on from being paid your worth, you may find that in order to achieve this you’ll need to negotiate with your client. This will come more naturally to some than others, but it’s important to negotiate the rate you deserve and the terms of the contract.
Before negotiating, ensure you’ve done your market research. What are similar contracts paying, what are the terms of the contract, and do your skills and experience command better rates?
Failing to protect yourself
You must consider the correct business insurance you need to operate safely, for both yourself and your client. Some clients won’t offer the contract if you don’t have insurance, so it’s a must have.
Typically a contractor should have the following insurance types:
Professional Indemnity – protects your business should a client make a claim over a problem with your work. Should you need to pay compensation to settle a claim or correct a mistake it’ll cover your costs, along with the cost of your legal defence.
Public liability – If property is damaged or someone is injured as a direct result of your actions, public liability will cover the cost of any claims from third parties, including compensation pay-outs and legal costs.
Fee protection cover – covers your costs incurred when HMRC carries out an enquiry into your IR35 status. If you’re found to be ‘inside’ when operating ‘outside’ you’ll need to pay back tax plus any fines issued. Fee Protection Cover protects both you and your Limited Company from any unforeseen additional costs incurred with an HMRC enquiry (including IR35 enquiries). For more information on IR35, take a look at our free guide.
Using your personal bank account instead of a business bank account
When you start a Limited Company, you and your company are two separate entities. This therefore means that all your personal transactions should be kept separate from your business, and vice-versa. Which is easy to do with a Mettle business bank account – you can categorise your transactions, send payment reminders to late payers, and even make customisable invoices all from the app.
Your accountant will also need a clear view of your accounts and understand where money has come from, and what it’s being allocated for. If it’s all in one account it’ll make it difficult to understand what money is for which entity.
Not paying your taxes when they’re due
Not paying your taxes on time is one of the biggest mistakes you can make. Limited Company contractors have a number of taxes to pay throughout the year on specific dates, including Corporation Tax, PAYE, VAT and National Insurance. When you don’t pay HMRC on time, you incur penalties and interest charges, which no one wants!
Ensure you enlist the services of a specialist contractor accountant who will be well aware of your responsibilities, and be able to help you budget the correct amount of money to pay your taxes when they’re due.
Not getting the right accountant from the offset!
Choosing an accountant just because they’re cheap, or offer a whole host of empty promises to get you to sign up can be another red flag. When choosing an accountant you want to look for one that specialises in the complex tax needs of contractors, understands the role IR35 plays, and ultimately will maximise your take-home pay whilst keeping you on the right side of the taxman.
At SG Contract Accounting, they offer all that plus so much more. Get in touch to speak to one of the team about how they can help you, or take a look at their services.
