Unlike traditional employees, contractors do not receive any ‘perks’ from their clients, such as non-contributory pensions, health insurance, or any other type of protection in case things go wrong. Fortunately, a wide range of financial services are available to contractors – from competitive mortgages, to income protection policies.
In this broad guide, we look at all the major types of financial product you can access as a contractor, from mortgages to business bank accounts.
In the early days of the contracting industry, many contractors found it hard to secure a typical ‘high street’ mortgage, or certainly not ones which offered competitive rates. It used to be notoriously hard to prove your income, especially if you had only just embarked on your first contract. Without three years accounts, most lenders would be unable to help, and even then – many unenlightened lenders were unable to understand how contractors operate.
Fortunately, most major lenders are now more familiar with the financial profile of contractors, and you can now access mortgage products previously reserved for traditional employees. The industry as a whole has had to play catch-up as the UK’s workforce moves from a decades-old model where most professional people hold long-term employment, to one where flexible working is becoming far more commonplace.
Mortgage specialists within the industry can also secure competitive contractor mortgage rates based on your contract rate alone; you no longer need to have several years of accounts behind you to pass the affordability checks. Of course, your credit profile and financial history will need to solid – especially as lenders have more stringent checks in place following the sub-prime crisis and subsequent credit crunch.
The new Government-backed ‘Help to Buy’ scheme, via which the Coalition plans to invest £3.5bn in deposit guarantees, may also be of interest to contractors. Under the terms of the scheme, the Government will provide assistance to house buyers who are unable to save up the 25% deposit needed to secure the most competitive mortgage rates. If you are buying a property valued at up to £600,000, and can provide a 5% deposit, the Government will underwrite the remaining 20%. The scheme is currently only open to new-builds, but from January 2014, you can apply for the Help to Buy scheme if you intend to purchase any type of property.
Find out more in our guide to contractor mortgages.
Pensions have been described as the ‘last remaining tax break’ available to contractors. In recent years, the tax benefits of contributing to a pension scheme have been reduced by successive chancellors, but there still remain good tax saving opportunities if you opt to save for your retirement using a pension.
The annual allowance for pension tax relief is currently £50,000 per year, however this is set to drop to £40,000 from April 2014, so you may want to discuss your retirements with an IFA to make the most of the current allowance.
Find out more in our concise guide to contractor pensions.
3. Income Protection
Unlike permanent employees, who in many cases enjoy protection from their employers if they are unable to work for an extended period, contractors are very much on their own, and for this reason, we recommend you consider what would happen if you fell ill and were unable to undertake your contract duties.
There are various income protection policies on the market, but they all operate in the same fundamental way. After an initial deferred period has expired after you have notified your insurer of your illness, the policy will pay out a pre-agreed sum each month. The longer the deferred period, the lower the monthly premiums. And unsurprisingly, the higher the monthly income you need if you fell ill, the more you can expect to pay.
The tax treatment of any money paid out under an income protection policy will depend upon whether you take out the cover via your own limited company, or personally. A specialist IFA will be able to help you work out which is the most prudent route for your own needs.
Find out more about income protection for contractors.
4. Life Cover / Keyman Insurance
Alongside traditional life cover policies, which cover you and your family should you die, limited company contractors can now fund a life insurance policy through the business, with no benefit in kind (BIK) or income tax implications.
This type of ‘keyman’ life cover policy operates via a discretionary trust, and can easily be transferred either to a new employer (or to you personally) should you decide to close down your company, or stop contracting, for example.
This product works by providing ‘death in service’ benefits to a company’s employees – so that the income received by the beneficiaries is also free from Inheritance Tax.
Find out more in our guide to relevant life insurance for contractors (paid for by your company – the most tax efficient option).
5. Business Banking
If you are setting up as a limited company contractor, you will have to open a dedicated bank account for your company, as it is a distinct legal entity. Rather than simply opening an account with your personal banking provider, you’d be surprised how much you could save in transaction charges along by comparing providers.
Almost all the leading banks will provide up to 2 years’ free banking to new companies, however you need to find out what charges apply once the free period expires.
Some banks, such as Cater Allen, have long been a popular choice for contractors, as they offer genuinely free banking, subject to a reasonable amount of monthly transactions.
Try one of the ubiquitous financial comparison sites to compare the current deals on the market.
You could also benefit from setting up a deposit account to hide away your future tax liabilities. You may as well earn some minimal interest until your Corporation Tax or VAT deadlines arrive!
Find out more in our guide to business banking for contractors.
Specialist Contractor IFA
If you have any questions about any of the financial services mentioned here, you can get help right away via our partner IFA, Contractor Financials, or call 0333 370 8888.