When working as a self-employed person, a contractor, sole trader, freelance worker or when running your own limited company, getting paid does not have the same certainties as being an employee.

For many, the thought of understanding when payments are made and managing pay from multiple employers can be daunting. Also, the challenge of maximising the amount you take home while also planning for the worst case scenario can feel overwhelming.

Most people rely on a regular paycheck to manage their finances and attempting to streamline pay from different contracts with varying start and end dates and different pay rates can make planning for cash in the bank a major headache.

Managing payments will boil down to whether you decide to set up your own limited company or be “employed” by a professional employment company – often known as an umbrella company.

Here we provide some tips for bringing clarity to when you get paid, how much you can expect, how you can maximise take home pay and highlight some of the important benefits you should consider.

Working with a professional employment company

Operating through an umbrella company is the simplest way of managing the pay you receive and ensuring you can operate in the most tax efficient way possible.

With this way of working, contractors, sole traders, freelancers and temporary workers effectively become an employee of the umbrella firm. In the eyes of the tax man you are classed as a permanent employee whose job is to work on a series of temporary workplaces – the contracts you choose to take on.

The role of the professional employment company is to manage your finances, make sure you are tax efficient and, most importantly, ensure you are paid regularly and on time. In return, you have to submit time sheets and any claimable expenses. However, be aware that HMRC is changing the way people who work for intermediaries can claim tax relief on expenses.

The amount you receive depends on how much you can charge your clients but a decent umbrella company will be able to provide expert advice on pay rates and what you can expect to take home.

Setting up your own limited company

Limited companies can be the best option for many contractors but are often better suited to higher earners. You will need the services of an accountant to maximise pay and manage tax returns but, during the majority of the financial year, you will have to manage your own finances and chase invoices for payment.

The most common way of paying yourself if you trade as a limited company is to pay yourself a combination of salary and dividends. This keeps your salary low and minimises the amount you pay in tax and National Insurance Contributions.

The salary you draw is dependent on the amount you turnover and you then take a dividend from the business, which offers better returns on taxes and aren’t subject to National Insurance Contributions.

How do I maximise my income if I’m self-employed?

If you work with an umbrella company they will help you do this and encourage you to save by claiming all allowable expenses.

If you work as a limited company, keep your accounts in good order to simplify and speed up the process to minimise accountancy fees and look at the best way to deliver the greatest savings through a salary and dividend mix.

Make sure you hit all of your accountancy and statutory deadlines – especially your annual return – as the penalties can be significant. Don’t forget to register for VAT if your turnover reaches £81,000 over 12 months.

Time your dividend payments carefully. If you’ve already reached the higher rate threshold, try to delay drawing down profits until the next financial year. Also, claim any expenses related to fulfilling your business duties as this will deliver a wealth of tax savings.

Finally, consider setting up an executive pension scheme. Your company can invest pre-tax income into the pension, which provides major savings compared to paying into pension schemes post-tax.

What benefits do I need to consider if I’m self-employed?

When starting out you must plan your finances very carefully. Make sure you understand all the costs involved and make sure you charge an appropriate amount and don’t leave yourself out of pocket. Also make sure you have enough funds to carry you through while you establish your business and secure work.

Be prepared for ups and downs in the business and try to save money to carry you through any quiet spells that may lay ahead. Also, factor in costs for training yourself. It’s important you stay at the top of your industry and you may need training to understand new processes or meet set standards.

You should also consider replacing some of the protections and insurances you had as an employee to make sure you can provide for your family now and in the future.

Set up a pension, there are some really great tax efficient ways to do this when you are self-employed and it’s never too early to start saving for the future.

Remember, you won’t get paid for holidays or maternity or paternity leave so make sure you’re financially prepared for any breaks you plan to take.

Finally, look at sickness and life insurance policies. What will happen if you fall ill or the unthinkable happens? Now you no longer have the support of a permanent employer, how would you and your family cope if you were unable to get out and earn money?

Do you have any advice for people considering what to charge or the most effective way to work as a self-employed person? Share your experiences below.

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