Creating Higher Personal Value
Contracting is the ultimate labour market illustration of the law of supply and demand. Highly experienced professional talent resources applied to a short-term mission, the relationship ending when the mission is completed. Whether contracting is right for you or not is discussed in a companion article as are the many non-financial benefits. However, in this piece, we talk about how you can leverage maximum personal value from working as a contractor. Getting this right is important as there are downside risks associated with contracting, such as job insecurity and lack of certain employment benefits. If you are an experienced contractor, then much of what is said herein will already be familiar to you, however a reminder of expense management opportunities can be a help.
Contracting in a general sense opens opportunities to work with various types of organisations and across projects in different industry sectors, options that are not typically available to permanent employees. Building that experience and a demonstrated track record of delivery is key to increasing personal value in the market.
Contractors with this type of profile are paid significantly more for their work as a result, much more than with an equivalent employee of a business. As you would expect, market rates are aligned to the general availability of a specific skillset, particularly when those skills are in short supply or where projects have tight deadlines for completion.
Many contractors work hard to identify the likely current and future needs of clients and ensure that their own skill sets and experience are aligned to these. Consequently, they consistently achieve higher personal value and work when they want to. Adopting a contracting career is not about keeping working between permanent roles, it is about managing yourself as a professional contractor, thinking ahead, running your own business.
Managing the P&L
Having made that point about this being your own business, in general, if you are contracting, you should be operating through a Limited Company Structure and set up as a Proprietary Director of that company. Alternatively, you can operate within an Umbrella Structure. This article is simply a guide and what follows should not be interpreted as tax advice. There are a small number of excellent service providers who can assist you in setting up your company or structure and provide you with ongoing tax support.
Whichever path you choose, your company structure can deduct from its income (effectively your charge rate) most expenses incurred in the conduct of business or the performance of duties. Generally, this is straight forward when viewed in the context of the particular circumstances of the contractor (e.g. contract location, length, nature of work). Some categories of expense such as company cars or mobile phones are fully deductible but carry a benefit in kind tax charge subject to the extent to which they are used.
While information on what type of expenses are deductible is widely available, for the purpose of this article we highlight the following:
Business travel expenses - if you use your own car for business journeys then you may claim a mileage allowance. Business journeys will tend to start from your normal “place of business”. Your normal “place of business” is defined as where you carry out substantially all of your duties. Even if your business is registered at your home address you cannot claim for travelling between your home and the site at which you are working.
Bicycles – you may can claim the government bike to work allowance through your company once it is used for qualifying journeys and you meet the other conditions attached to the scheme.
Telephone, WiFi, light and heat - a proportion of your household expenses may be allowable if you use your home partly for business purposes. It is not necessary that your home should also be your base.
Professional Fees – all fees related to banking, accountancy and tax services or relevant legal services should they arise, are tax deductible expenses.
Professional Education – Additional learning programmes or CPD relevant to your area of expertise are allowable, as are professional association membership fees. Note that there are some qualifications around courses aligning to contract duration so this should be reviewed in advance of any commitment.
Office costs – stationary and related items.
Meeting expenses – costs arising out of meetings to generate a contract or new business may be claimed. This might include your own costs in respect of lunches with clients or for meetings with a recruiting firm. Travel related to these meetings may also be expensed.
Security – Subject to you holding confidential work-related data at home, you may be able to claim the cost or partial cost of acquiring and running a home alarm system.
Subsistence – As with any employee and as an employee of your own firm you can claim for meals and refreshments when away from your normal place of work.
Permanent Health Insurance – this is a vital purchase for anyone who is self-employed and many contractors forget this is paid from gross pay. A policy can be set up through the company while also being allowed as a deduction for Corporation Tax.
Health Insurance – While there is a BIK hit, similar to the Permanent Health Insurance, it makes more sense for the company to pay this directly rather than through after-tax income.
Pension Contributions – where possible the contractor should arrange for an Occupational Pension Scheme to be set up. There are various rules around the operation of this and professional advice should be sought. In order for company pension contributions to be tax deductible, they need to have been paid in the period. The contractor as an employee can make personal contributions, reducing the amount of personal income tax payable. Combined this makes a tax efficient means of creating value in your pension fund.
The company can provide a Travel Tax Saver ticket. There is no BIK on the provision of this.
The purchase of assets (computers, tablets, some phones etc) for continued use in the business qualifies for capital allowances under Corporation tax, though BIK rules will apply in the case of company cars. Note however, that vehicles classified as commercial and motorbikes attract a much lower rate of BIK.
Your accountant or a Contractor Service firm will give you confirmed and appropriate advice to your personal situation, but make sure you consider all deductible expenses, before determining the appropriate salary that is to be extracted from the company.