Financial Planning Tips For Contractors

Self-employment is on the rise. According to the Office of National Statistics (ONS), the number of self-employed was over 4.8 million in 2017, an increase from the 3.3 million workers in 2001.

Financial Planning Tips For Contractors
Daniel Boden

Daniel Boden

Chartered Financial Planner

For those new to self-employment, a common consideration is how to replace the benefits and safety net of an employed position. First and foremost - what would happen if you were off sick?
This article examines ways to replicate some of the security of employment in the self-employed world. 

Health Benefits

There are several protection benefits employers can offer such as Private Medical Insurance, dental plans, health screenings and Critical Illness insurance. Below are the most common benefits we are asked about. 

Income Protection 

Most employees can claim Statutory Sick Pay (SSP) of £89.35 per week after 4 days of illness for up to 28 weeks. However, usually employers offer full pay for a period of time whilst employees are off sick; this is a vital benefit that many have used during their careers. 

An equivalent benefit for self-employed workers is Income protection, which pays out cash if policyholders are too sick to work. There are different ways these plans can be set up, including having the business pay for the premiums, which are an allowable business expense.

Life assurance

Death in service is a common benefit for employees which pays out a lump sum of cash on death of an employee, usually expressed as a multiple of salary (i.e. 4 x £80,000 salary = £320,000 lump sum paid on death to the employee's family).

An excellent alternative for employees is ‘Relevant Life Assurance’. In short this is a life assurance plan paid for by the business.  To qualify for this cover the individual has to be a ‘UK-resident employee’ which includes company directors and salaried partners, but equity partners and sole traders (as owners of their business as opposed to employees) are ineligible. A UK-resident business can be a Limited Company, Limited Liability Partnership (LLP), a charity or even a sole trader.

Check our previous article for a detailed analysis of this benefit.

Pensions

One of the key benefits that will be lost for those becoming self-employed is employer pension contributions. Most employers at least match employees’ contributions, immediately bolstering savings for retirement. 

Pension contributions are the most tax efficient way to extract profits from a limited company and can also reduce the income tax bill of a sole trader or partner. Our previous article discussed pension contributions made by a company in greater detail, but briefly, they are usually classified as an allowable business expense which reduces a company corporation tax liability. 

Providing funds are available, it can be possible to make a large company contribution to a director’s or an employee’s pension of up to £160,000 (per person). It is, however, important to check before any large contributions are made to pensions to avoid triggering a tax charge. 

Moving to a new company or becoming self-employed is often a prompt to review (the often many) pension pots accrued over a career. There can be significant benefits to consolidating pensions into one plan, which we discuss in a previous article

To discuss your financial planning, request a call back.

This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Ermin Fosse and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Ermin Fosse’s services.

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