Saving 101 for contractors

A decent nest egg is a valuable asset to ensuring your success as a contractor. To manage any occasional business lulls, keep yourself cushioned against unexpected difficulties and benefit if you later stop contracting, retire or chose to pursue a new business venture – you need to ensure you have viable savings.

Arranging your fees to save while times are good

We all know the fundamental rule of saving as a contractor – save when you’re earning for the times you’re not. Most contractors will experience times of boom and bust throughout their career, ensuring consistent savings when work is flowing means you can survive any dry periods. This can be easier said than done, however.

Saving requires discipline when dealing with your finances, but if you’re consistently struggling to save it might be time to re-evaluate your fees. An an independent professional you need to ensure you are selling yourself appropriately. Remember, you’re not a permanent employee; your fee is not just to pay for your expertise and time but also to ensure you can provision for when you can’t work, holiday pay and retirement planning.

Many of our clients suggest the best way to arrange your fees is to price yourself so you’re capable of surviving on just two or three days pay a week. These days should be able to cover your essentials, ensuring you keep a roof over your head and remain in business. Anything you make from the additional days is then there to provide your savings, and once comfortable, to boost your quality of life.

How much should I be saving?

‘At a minimum, contractors should have enough savings to survive without any work for three months. Ensuring that you could last for six to nine months would see you very safely set.’
Matt Poyser, inniAccounts Director of Customer Experience and former contractor.

For many contractors saving is a constantly evolving goal, alongside their rainy day funds many will be growing funding towards retirement or new business ventures. Examining your recurring expenses can give a clear picture of exactly how much you would require to keep you and your company afloat between contracts.

How should I be saving?

There are many techniques you can employ to ensure you are saving money. The easiest is to have a standing order – a set payment taken at a set frequency, say every month. A standing order can ensure you are consistently topping up your savings without any worry. You can always pause your standing orders in any down periods. Experts suggest people who save through a standing order are far more likely to have robust savings to those that save as and when. Ensuring you consistently put money aside will help to safeguard it from being used anywhere else in your business. Don’t leave your funds sitting idly in a standard account though – be sure to find a savings account where you can accrue interest at a competitive rate.

Boost your savings by keeping detailed and accurate records, including receipts that allow you to claim for all reasonable business expenses. Consider going green (using less energy means you’re spending less on energy) as well as searching for cheaper alternatives for expensive software and currency exchange savings. Some of the tactics you may have used for your personal savings, such as saving odd cash left at the end of the month or utilising smartphone apps, could also benefit your business savings.

Should I save within or outside my Limited Company?

If you have long-term goals in mind, saving within your company will likely be the better option. This keeps money within your company, ensuring that in times of hardship your business can stay afloat. Retaining your savings may also benefit you when you later come to close down your company. You’ll be able to leave with the extra savings you’ve accumulated and a potential relief on your final tax bill.

By keeping your savings as an asset of the company, you may be liable to pay less Capital Gains Tax. Entrepreneurs’ Relief means your qualifying assets (such as your savings) will be taxed at 10% instead of the usual Capital Gains Tax rates of 10% to 20%; depending on your income.