There are many benefits that go hand-in-hand with pursuing a career as an independent contractor. Greater earning potential, better control over career progression and an improved work/life balance are likely to be just three of the reasons why you entered, or are considering entering, the world of contract work. With great rewards, however, comes greater risk.
Contractors do not have the same job security as employed people, and there is a greater risk of financial loss. As a leading provider of innovative finance solutions for the contractor market, we work with contractors serving all industry sectors.
Our aim is to make the management of their accounts easier, more effective and more tax efficient. Our experts provide ongoing support with tax and accounting all year round, and help clients find ways to maximise the rewards of contract work and minimise risk. Here we share our tips for reducing the risk of personal financial loss for first time contractors everywhere.
Get the right insurance cover
There are lots of insurance products out there aimed at contractors looking to improve the security of their career. But is insurance really worth the extra expense?
In short – yes. The right insurance products provide the protection you need against a range of worrying issues. Professional indemnity insurance is a must for all contractors, and covers the cost of legal defence and damages. Many companies employing contractors have made a professional indemnity insurance policy mandatory to protect themselves and their contractors should cases of negligence, intellectual property breaches or data loss arise.
Tax liability insurance and public liability insurance are two other worthwhile investments for those wishing to keep personal financial loss to a minimum, should any issues occur. The latter is particularly important if you contract on-site with a client and damage any facilities or equipment there.
Consider going limited
Whilst providing your contract services independently means less administration and fewer costs on the legal, accountancy and company filing side of your business, going limited does have its advantages.
In addition to providing a much more tax efficient way of working, in comparison to working under an umbrella company, limited company contracting means that your personal liability as a director is also limited. Contractor Calculator explains:
“This places the sole trader’s and partners’ personal assets at risk, and they could be made bankrupt if their business fails owing money to creditors and any unpaid income tax and National Insurance Contributions (NICs) to HMRC. A limited liability partnership (LLP) and a limited company are separate legal entities from their partners/shareholders/directors, and so any business debts are not passed on to the individual LLP partners and limited company directors, unless there has been tax evasion or fraud.”
Despite the reduced personal liability should something go wrong within your company, as a director you still have total control of the financial and operational affairs of your business. Keep in mind though that if you personally guarantee a business loan, you will be liable for its repayment.
Fine tune your contract
Having a written contract in place before you begin providing your professional services to clients is a must when contracting, whether you are an independent or limited company contractor. Your contract offers a solid foundation that will communicate clearly with your client what they can expect from your service as well as outline the rights and obligations of both parties involved. Whilst many contractors work without a signed contract in place, a contract provides an excellent defence that will minimise any problems or disputes that may arise.