Money & finances. General advice for IT contractors

Article provided by ContractorMoney.

If you are thinking about becoming a contractor, or have been contracting for a number of years, the financial benefits of setting up on your own are quite obvious. Contracting allows you freedom to build up a varied and impressive CV and the financial rewards can be far greater on leaving permanent work. However, management of your money is now up to you. This section details the key components of contractor finance; the pitfalls and the benefits.

As a new or established contractor it is inevitable that you will require access to financial service products. In permanent employment, a lower, salaried income is enhanced by additional benefits such as sick pay, company pension scheme, medical and life insurance. These benefits are largely taken for granted but provide vital protection from hardship that disappears the day that you start contracting.

Depending on your circumstances, you will need to replace some or all of this safety net and must now find the costs personally. You will have the means to do so thanks to your newly enhanced income and much of this package can also be provided very tax efficiently through your limited company. Additionally you must make the most of your decision to contract and it is important that your money is set to work as efficiently as possible. Company and personal tax breaks must maximised so that the Inland Revenue doesn't end up the real beneficiary of all your hard work! This can be achieved by careful structuring of your finances and tax efficient investment of surplus income.

There are a bewildering number of insurance companies, banks and other providers of financial services but many of their products will be poorly suited to the unique position in which a contractor operates. Pensions and investments must have low set up costs and have complete flexibility of the number and level of contributions required, mortgages must take into account dividends with competitive interest rates and protection products must be tailored to your particular circumstances.

We advise that you seek an independent financial advisor (IFA) who specialises in the contractor market. Only an independent advisor will be able to scan the market for the most suitable product at the best price and only a specialist will properly understand your situation. You should structure your affairs so that you have flexibility in case you return to permanent work, go abroad or need to react to the unforeseen such as IR35.