Introduction
While contracting offers many perks over being employed, it also brings a number of drawbacks.
As a contractor you do not receive a lot of the benefits that employees are afforded, such as health insurance, pension top-ups, or the ability to just show payslips when having to prove your income.
This section will advise on how you can navigate around any potential problems that face contractors in this area.
As a general rule of thumb, contractors earn more than their employed counterparts, therefore you would think it was ludicrous that they have more difficulty obtaining a mortgage than employees.
Unfortunately for contractors this is often the case.
Most of the ‘high street’ lenders want proof of income for a prolonged period of time (usually 36 months). If you have only started contracting recently or taken the step to setup a Ltd Company in the past couple of years then this can be a problem.
There are some lenders that will take a more pragmatic approach and will issue mortgages based on the value of a contract.
We would recommend that you speak with a contractor-specific mortgage broker that will be able to point you in the direction of these companies.
Insurance
As mentioned in the Ltd Company Business Insurance section, there are three types of insurance that your company is likely to require:
This will protect your company against the cost of compensation claims arising from employee illness or injury sustained as a result of their work for you. It is a legal requirement for a business employing one or more people to have this. Fines for not complying can reach £2,500.
This will protect you if clients or members of the public suffer personal injury or property damage because of your business. It covers the costs of subsequent legal expenses or compensation claims and is an integral cover for businesses that interact regularly with customers.
Professional Indemnity Insurance
If you are alleged to have provided inadequate advice, services or designs to a client, this insurance provides cover for the legal costs and expenses in defending the claim, as well as compensation payable to your client to rectify the mistake.
Other
There are other type of insurance available that isn’t mandatory but may be worth considering:
Health Insurance
This can be paid for directly through the company with no tax liability attributed to the company. A Benefit in Kind will arise on this though that will be paid by you personally.
Insurance against Tax Investigation
HMRC do not need a reason to investigate an individual and/or company, they can launch an enquiry at random. In 2015 HMRC collected £26.6bn in unpaid tax, £3bn more than in 2014, and have received further funding to help them improve this further.
The costs to defend yourself against HMRC could mount up to a substantial sum should the investigation go on for a number of months (some last years).
There are many option in this area depending how much cover you wish to purchase.
Director’s Insurance
This offers financial protection to persons who are the director, partner, or officer of a company. If a claim is ever made against one of these people the insurance should cover the cost of the compensation.
Property, Contents, Vehicle and Office Equipment Insurance
These are all options available to you that you may want to consider. Most of the leading insurance brokers will be able to offer this.
As a Director of a Ltd Company you are likely to be looking for ways to extract your profit in the most tax-efficient manner.
Pensions are one of a number of expenses deemed allowable by HMRC, meaning that anything you pay into a pension will reduce your company’s gross profit, and therefore, your tax liability.
You can contribute to as many different pensions within one year as you like – Personal, Company, Stakeholder and Retirement Pensions can all be used.
There are restrictions on the amount you can contribute though.
As of 6th April 2014 the annual allowance for tax relief on pension savings in a registered pension scheme was reduced to £40,000 (up to a lifetime allowance of £1m). This includes contributions made by anyone else into your pension (such as an employer). If your pension savings exceed this amount you may have to pay a tax charge and give details of this on a Self-assessment tax return.
There are many options now available to contractors when it comes to receiving money out of their pension.
You can start drawing down on your pension pot at the age of 55 and a tax free lump sum of 25% (up to £250k) is able to be drawn as well.
