It was two days before my first contract was due to start and I was suddenly feeling very vulnerable.
“Are you okay?” shouted an old lady across the street. I glanced up, nervously smiled, and nodded. “Close one!” she added, “they need to watch where they’re bloody going!”
Moments earlier a truck had turned a corner a little too quickly and a little too tightly. In doing so it had mounted the pavement, with the goods onboard making a huge crashing noise. I was standing only centimetres away as this happened. A startling moment, and a close call – but I was fine, and I continued walking home. My mind wandered back to “what if”.
What if I got hit and killed? Well, I couldn’t go to work in two days. But what about my fiancé? I guess she’d grieve forever and dedicate her life to preserving my memory, build an shrine, etc but she’d be doing so without any payments. No death in service for contractors. And, at the time, no life insurance from the dearly departed. I didn’t even have a will.
What if I got hit and injured? No sick pay and phased return to work for contractors. But the bills would keep coming.
One of the most notable changes in your life when you go from permanent to contracting is your relationship with money. The rates are higher and your income goes from being aligned with lower management levels up to comparable with the Managing Directors of medium sized companies in the UK. It’s really helpful to anchor yourself a little and try to exercise some discipline though. The best advice I received about contracting was to try to continue spending the same was when I was a permanent. It’s really tempting to start spending on holidays and new cars, but you need financial discipline. Here’s why:
- You have to pay a whole bunch of new taxes. Contracting is tax efficient, but it’s also unforgiving if you don’t pay what you owe – they’ll send you to prison quicker than they would a drug dealer. You have to put that money aside – so I asked the bank to set up a savings account with the business account. I set up a standing order to take money from the main account each month and put it in the savings to cover payments I’d need to make on taxes such as corporation tax, VAT and NIC. It gained tiny amounts of interest, but that wasn’t the point. I didn’t touch it until those bills arrived. Psychologically it was not my money.
- You get paid a lot as a contractor, and part of the reason for that is to offset risk. The risk is your contract can end abruptly for no fault of your own. You don’t get redundancy payments and most companies will exit you the second your work is done. It’s not personal, it’s not because they don’t like you. You are just another business overhead and you are gone the second they don’t need you. Unlike with permies, they have no obligation to find you more work. Accept that and don’t take it personally or be surprised if it happens. So, build up savings for this eventuality. Most contractors that I know use a limited company, pay a low level of PAYE income and get the bulk of their payments via dividends – it’s the most tax efficient approach, and despite recent changes in how dividends are taxed remains the most efficient approach (check with your accountant – yes, get an accountant – as further changes will take place after this is published. I’m not a financial advisor, etc etc…). When getting the dividends, again I set money aside for tax which will be calculated with self assessment each year. But I also set aside emergency money. That money is there for if a contract abruptly ends and the idea is it can pay for the rent/mortgage and other key bills for at least 6 months. It’s that high because there are times when the market is quiet. You could end up out of work in October, when the seasonal quiet spell runs pretty much through until March – so 6 months living costs is playing it safe. You may have guessed, I didn’t go on a wild spending spree in my first few months. I saved up for taxes and emergencies. Real exciting blog, eh?
- Nearly being squished by the truck got me focused on a few other items. I wrote a will – which I really should have done whilst being a permie. There’s no excuse, it’s not expensive or particularly time consuming. And don’t think it doesn’t apply to you – everybody dies and hardly anybody has a choice about how or when, so do your paperwork. Next I got life insurance. It wasn’t a lot, but would have made my fiancé comfortable (and able to afford that shrine). Since becoming a homeowner (I should point out, I only became a homeowner after contracting for over a year – I didn’t break my own rules on spending), I’ve had to increase this – but that’s to be expected I guess. Next I got health insurance. The cost can be determined by your health history, your lifestyle, age, etc but I would say in almost all cases it is worth having as a contractor. Whilst you’re not working, you’re not earning. Being on a massive NHS waiting list is going to destroy your savings if you’re unable to work, so pay the insurance and get treated fast when needed. Lastly, I got payment protection and critical illness cover. I consider these to be optional items and I only got them after getting the mortgage. They are not cheap, but I figure I’m hedging my bets with them. They are useful for if you have a catastrophic illness or injury that prevents you from going back to work for a long time. It just keeps paying the bills for a specified amount of time. My advice here is look into it, but make sure you read the T&C’s closely.
- The last big change in the relationship to money for me was suddenly being more interested in investments. I’m not going to make any specific recommendations on this – but you should look at which bank accounts give you the most interest. You should look at the best ISAs. You may have an interest in getting even better returns and start looking at riskier investments. I subscribe to Which? magazine which offers a little advice in these areas, but they also have a monthly specialist magazine called Which? Money. It’s well written and is targeted at people with only basic knowledge of investments – so it’s worth a look.
Anyway, after getting my financial ducks in a row I was ready to start contracting. I wasn’t so naïve to believe it would be like joining as a permie, I knew there’d be no time to get settled and that value was needed almost immediately, so I had no big shocks in that sense. I also knew to expect some resentment from permies, but didn’t actually experience any of that on the first contract. What did surprise me though was the attitudes of some of the contractors…
To be continued…