Managing your finances as a freelance creative contractor

‘There are added risks that are attached to a freelance lifestyle’

A great number of new arrangements kick into place when someone moves over from being an employee to becoming a Contractor. There are many more that you may wish that you had understood or considered at an earlier juncture. As previously re-iterated initially overall you will be earning more net through being a contractor, given the same amount of working days that you were working via a full-time employee arrangement. However, there are added risks that are attached to a freelance lifestyle.

  • What happens if you are too ill to attend or to work even remotely?
  • What happens if a client becomes so peeved in a dispute that you get sued?
  • Is the business going to throw off enough cash to finance your lifestyle, not just now and particularly if your fixed costs are low and your lifestyle is uncomplicated?
  • Will you be able to obtain a mortgage in the future, take holidays like a regular employee would, will your fees net of expenses also provide enough to be able to save, to provide for a pension, to fund a child’s education?

These are not simple questions to answer.

Investing-managing finances

New Requirements

One fall back to all of this is that it’s often said that no Entrepreneur would embark on such a pathway if they knew what they would have to go through to succeed in their business venture. It cannot be hidden that working for yourself will ultimately be more demanding that the pathway that employees follow. Take for example the point that all the admin practicalities of running a company, which not only have to be completed but become the Entrepreneurs responsibility legally to get right. New requirements of doing so will include;

  • Bookkeeping
  • Holding AGM’s
  • Formally recording meeting minutes
  • Making Annual Returns
  • Filling out Dividend coupons
  • Keeping personal and business bank accounts separate

Financial Planning

Frankly, all of this is a headache to some. They are though the nuts and bolts of how a company works and if you don’t know how to effect these matters yourself you best find someone else that does.

A considerable number of employees find their careers ‘topping out’ at some point and then consider turning to Contracting or a more flexible work schedule. They will at that point probably have more safety measures in place – a home with a mortgage partly paid off, a small pension pot accumulated. However, most Entrepreneurs will gladly inform these new entrants that trying to make a business work and gain traction in the business community is different to becoming a lifestyle part-time worker later in life.

The dream is to build something that you and others will consider to be a triumph. Ultimately this offers the possibility of passing something onto your children or selling a business for substantial money such that you can have as relaxed a retirement as you would wish for. It does though make sense to consider some of the practicalities in terms of long term Financial Planning when you become a Contractor.

Pensions & Insurance

Professional Indemnity Insurance – in reality this is unlikely to be required unless you are bidding on substantial contracts that require a team to be put together. Before then you may have to consider getting a quote for Insurance for vanilla assignments when it becomes a regular occurrence that counterparts are asking for Indemnity insurance details in the course of contract negotiations. The rates for this type of insurance can vary widely. It is often best to see what group offers maybe available through the membership of a trade body.

Pension – it’s likely that we will live longer and work longer than our forefathers. It’s beyond this article and in fact my personal competency to advice in this matter. If you have employees and are a business of a certain scale there is a new Government requirement to automatically deduct pension contributions from your staff’s wages and pay these over to the Government (see a service provider such as these for advice).

There are generous tax allowances for personal pension contributions that you may allocate from your Contracting earnings. You can if you choose personally manage your Pension pot via an approved SIPP wrapper allowing for investment in an unusually wide range of assets, including for example Commercial Property in addition to the standard Unit Trusts, Shares, and Bonds. Quite a number of Contractors in recent times have taken advantage of the strong cash flow that come from contracting to invest in residential property. It’s worthwhile if you are invested in regulated pension funds benchmarking the performance of that fund from time to time via a comparison site established to do exactly that. Costs to move funds to another provider could easily be covered in the medium term by finding a more competitively managed fund.

Do you feel that you have a Corporate Identity yet that others could relate to?

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