Everyone wants to make a decent living from their job, and when you’re self-employed and contracting the power to do that is in your hands. With control over which contracts to take on and how much to charge for your services, you can find that you are able to make a lot of money for yourself when you’re your own boss. Contractors pay less tax compared to other forms of employment, so what happens if you feel like you’re actually earning less?
Those who transition from being in permanent employment to becoming a contractor may find they appear to be earning less as a result. This is more common than you might think; however, just because you seem to be taking less home doesn’t mean you actually are.
There are several common reasons for new contractors feeling like they earning less than before.
Before giving up on contracting, you should check that none of these apply to you:
1. Not taking overheads into account
The advantage of working for somebody else is that they take care of the overheads. Rent for office space, electricity, water, heating: they’re all covered. If you work in an industry that requires buying stock or equipment, you will probably have already taken that into account. However, many contractors provide a service, so may have forgotten about these elements.
If you work from home, you will find your bills increase as you are spending more time using your own electricity, water and heating. However, these can be claimed on your expenses. You can also claim things like fuel or public transport tickets if you have to travel, any business lunches or even your phone bill.
You may not be taking this money home right away, but having it taken off your tax bill can be a big relief at the end of the financial year.
2. Misunderstanding tax
Speaking of taxes, did you know that contractors pay less tax than permanent employees? It might not seem that way at first, but with a few easy tax tips, you can make sure you are taking home a tidy amount from your contracting wage.
One typical way of making more money from contracting is to only pay yourself a small salary. The rest of the money you take home will, therefore, be declared a dividend, which is only subject to a small amount of tax. You’ll only be taxed around 20 to 25 per cent of your income, which is a significant saving. Brookson assess this for you and can help you maximise your take-home pay, and because you have a dedicated accountant we check your accounts for you throughout the year so you’re always up to date. Since 1995, we’ve helped over 90,000 Contractors pay less tax by handling their accounts correctly and by providing a simpler and better way for contractors to manage their finances.
3. Not charging enough for your work you do when contracting
If you are already doing the right things as far as taxation and expenses are concerned, but still aren’t making enough, it might simply be because you’re not charging enough for your services. Many people set prices when they first become self-employed and don’t often do enough research initially.
Take a look at how much your competitors are charging, and work out how much you would need to charge in order to earn as much as you’d like. You might be surprised to see that you could put up your prices and still be competitive.
When searching for your first assignment, do your research and know your worth for the role you are looking to apply for. Set a target rate and try to stick to it. Your recruitment agency will be able to best advise you on a suitable rate and will work on your behalf to negotiate this with the end client.
This may be less than you are ideally looking to settle for; however, the rate is always negotiable based upon your skillset and match for that role. You might apply for a one-month role and be happy with that rate, but your contract may get extended and your pay rate, once set, is hard to negotiate.
4. Neglecting marketing
Of course, the other possibility is that you are charging enough, but aren’t getting enough work to earn a good wage. If this is the case, it might be worth spending some time on marketing yourself. Many people think marketing is a waste of time, and it’s not the job you signed up for, but without it how will people know who you are and what you can offer?
There are a number of different options available to you in this regard. One possibility is to go to networking events and meet people who could become clients. Another is to invest in building up an online presence so it is more likely people will notice you on the internet and see what you have to offer.
You should also make sure your CV is up to date and you are keeping active on jobs sites and professional social media sites, such as LinkedIn. If your information on these websites is always up-to-date and accurate, it will make it far more likely that you will be noticed by recruiters or clients looking to offer you work.
Yes, Contractors pay less tax but…
That’s because Contractors pay less tax compared to PAYE, but that’s only if their accounting is handled correctly and they have the guidance and support needed to succeed.
Don’t forget if you’re ready to make the change to becoming a contractor or if you’d like to switch to an accountant who works for you throughout the year, then contact Brookson today.