Five steps to a prosperous 2012 as a contractor
With the New Year now firmly underway it’s time to shrug off those January blues and plan your finances for what’s set to be another eventful year, writes Tony Harris, founder of ContractorMoney, an independent financial adviser to contractors.
And if the last four years in the contractor marketplace are anything to go by, it’s clear that it is vital for freelance or contract professionals to plan ahead so they can be ready for any eventuality.
For some, contract rates have gone into reverse as the cost of living has soared. Meanwhile volatile markets have given investors a white-knuckle ride while, with the state rolling back pension and other benefits as austerity budgets bite, old certainties have been blown away.
Here are five steps to put you on a path to financial security – that will also help you make the most of your money in 2012.
Step 1: Save tax on your life insurance
Rather than pay for your life insurance from taxed income, a ground breaking arrangement called a Relevant Life Policy, that our advisers at ContractorFinancials helped to launch, now offers corporation tax relief on premiums with no benefit in kind implications.
A carefully worded trust ensures that, in the event that the worst should happen, any payout is free from inheritance tax too.
Whereas you need to pay income tax on salary and dividends to then pay personally for life insurance from your private bank account, this Keyman scheme aims to tax efficiently replace the lost death in service benefits that you may have enjoyed while working as a permanent employee and is paid for out of your company bank account instead.
In most circumstances the policy is portable, so should you close your limited company in the future and need to restart paying a policy personally, you needn’t worry about fresh medical underwriting.
Insuring the main breadwinner is only part of the job though and you can also protect any employees such as your spouse (who may be company secretary for instance).
Step 2: Get company money working hard this year
Too often over the past few years we have had clients come to us suffering poor rates of interest on corporate bank deposit accounts. Inertia or lack of alternatives has often meant that, until coming forward, contractors just accept this as a sign of the times.
But as a group, there are thousands of pounds in extra interest for contractors to potentially get their hands on, partly reflecting the fact that we can look beyond the high street’s offerings which, in the main, aren’t freelance-friendly.
With inflation rising to 4.2% last month, earning less than this figure means that you’re losing money on cash you have with your bank. At the same time however, you might not want to invest in anything with risks attached even though you know this may earn greater returns. This is cash that you’ve worked hard to earn in the first place, yet this soul destroying dilemma can cause you lost sleep in the months ahead.
At up to 4.1% interest, better cash rates are now accessible (with the likes of Cater Allen), through speaking directly to the banks and by using our cash manager service via an offshore bond arrangement. This arrangement lets you defer corporation tax on any interest earned, perhaps enabling you to engineer a loss at the time of encashment of your bond so receiving the growth tax free. Interested CUK readers should reference ‘Luke Somerset’, our savings guru.
Step 3: Avoid tax hikes with a contractor pension
Pensions provide contractors with one of the few legitimate tax breaks still left and you can benefit from up to 69% relief.
After IR35, MSC rules, Arctic Systems and EBT raids, pensions are one of the last tax breaks still remaining, with literally tens of thousands of pounds a year in tax savings and deductions to be had. This is thanks to the far higher contribution limits and break in the link between low salary and pension contributions.
Indeed if your old payment method is now deemed too risky, using a pension to soften the blow of being back onshore could save tax today. In addition, it could also be the best long term move you ever make because government pension benefits are woefully low and are now kicking in at an ever increasing retirement age.
Limited company contractors can invest substantial sums over the course of each trading year. Umbrella company ‘employees’ can use salary exchange to save the equivalent of up to a 69% tax bill!
A £50,000 a year limit to contributions has posed difficulties to some, but is open to a work around for many contractors.
As well as using diploma qualified pensions advisers, the real trick is to make sure that any pensions investment effort in 2012 isn’t wasted. So don’t put new money or hold historic funds in old style, inflexible and poor performing schemes from the past. Be it NEST, PPP, SIPP, EPP or SSAS pensions. To truly reflect your contractor status and your need for complete flexibility in your tax-saving and planning retirement route, CUK readers should reference ‘Andrew Gains.’
Step 4: Make a will
Too often in our discussions with contractors, it becomes clear that, owing to their busy lifestyle, there’s no will in place. Indeed, it is has been estimated that seven out of 10 people have no will. Unfortunately it seems, too few individuals appreciate the potentially disastrous implications this can have for your family.
Without an up-to-date will you may not only be leaving an administrative mess for loved ones to sort out when they are least able to cope, but you may also inadvertently saddle them with unforeseen debts. You could also even end up gifting your hard-earned estate to the taxman.
Even more serious is the situation of the unmarried or those with kids because, in certain circumstances, a partner may end up penniless and the future of any children could be decided by the courts rather than the family. Nice to see I’m not the only one recommending not to leave crucial decisions in the hands of the courts.
A good IFA should not only help make sense of your affairs and meet any protection needs, but should also offer access to very reasonably costed legal work, available to you either remotely or via face-to-face meetings. With all these props in place, ContractorMoney is ready to help you start 2012 with this worrying issue firmly put to bed. CUK readers should reference ‘Jocelyn Morgan’ to be put in touch with a qualified will writer.
Step 5: Save, tax efficiently, to help towards time between contracts
A cash or equity Individual Savings Account can grow tax-efficiently over time. Yet in the event of an unforeseen need it can also be accessed, normally without penalty. You can invest monthly or as a lump sum, though you may be better off ‘drip-feeding’ your investment to help avoid the risks associated with current volatility in the markets.
In addition to providing a useful safety net and long term savings vehicle, ISAs can now be used as a nest egg for your children in the shape of a Junior ISA. For the first time, children can now shelter money in the same long term and tax efficient environment as their parents.