4 common financial issues when you’re working as a contractor

A contractor’s life is often unexpected, which is both the most wonderful and most stressful part of the job. Contracting in the UK market can be exhilarating: discovering new skills, getting to undertake varied assignments and travelling to new, unexplored places are all definite perks. However, this sense of uncertainty is not something many people relish when it comes to their finances. 

But it doesn’t have to be this way. New contractors often take a little while to find their feet as they embark on their new career and this is to be expected. But there are certain things you can do to ensure that even if you do encounter financial difficulties, you can navigate through them with confidence.

Here are four classic financial issues that contractors might encounter in their working life and our advice on how to work through them:


1. There aren’t enough jobs

This is a classic complaint if you’re a day rate contractor and it’s one that affects everyone, regardless of their experience level.

However, as you gain in experience you will start to notice that there’s a rhythm to your particular industry and that although there will be leaner times, they’re often easier to predict than you’d think.

Broadly speaking, think of the working year as having the same ebb and flow as the school year. Employers and HR departments are generally more distracted and less likely to hire when there are acknowledged holiday breaks around the corner.

That’s why the contract market often goes dead in high summer and around the Christmas period; people take time off to be with their families, decisions don’t get made so quickly and contractors don’t get hired at such a rapid pace.

That said, there are periods in the year that are often extremely good for contractors: new year, March/April and October/November. If you enter your contracting life knowing that there will be more profitable times alongside more lean periods, you can plan to adapt in order to survive.

You can also diversify when it comes to looking for work. There’s no single best site for contract jobs because assignments tend to crop up in unexpected places. As well as the more traditional website trawling, look on Twitter and LinkedIn, go to free networking events and keep your mind and eyes open.


2. Falling under IR35

IR35 is the curse of every self employed contractor. Despite what HMRC services are offered, it truly is a confusing minefield when it comes to proving that you’re a true independent business and not just working for someone on a self employed basis.

Every contractor knows that if HMRC questions their self employed status and they’re found to fall under IR35, they could pay exponentially more tax than colleagues who fall outside IR35. We’ve written a guide to IR35 to help you understand this complex area to make sure that you don’t end up paying far more tax than you need to.


3. Unexpected legal issues

No matter how good you are at your job, there will always be a client who’s displeased by what you do. But things can get really difficult if a client decides that you’ve exhibited professional negligence and decides to sue you. This is particularly common with IT contract jobs, where data is lost, deleted or stolen or a client’s site falls over because of a coding mistake.

Whether you’re an IT contractor or not, legal fees can destroy an independent business, even if you’re in the right. Retaining legal counsel, having to take days off to appear in court — all these things make a huge dent in your profit margins. That’s why it’s increasingly important that contractors take out professional indemnity insurance so that if you have to face the nightmare of defending your business in court, you know that your legal fees and any compensation you’re ordered to pay will be covered by your insurance company.


4. The time between jobs is too long

When contractors experience a stretch of unemployment that lasts for more than a month, they often start thinking about the benefits of working full time. Waking up without a job on the horizon can be a stressful thing, especially when you’re establishing yourself.

Before you became a contractor you may have heard the old adage that it’s crucial to have saved a minimum of three and ideally six months’ worth of money to live on. If you’ve embarked upon your contracting career without enough savings then this can be a challenging time. Equally, if you have saved but you’re beginning to run low on funds, it can be just as nerve-wracking.

That’s why it’s important to replenish your nest egg the moment you secure another gig, even if it means that you have to live more cheaply for a while. If you have a financial advisor, they might even suggest you invest your savings so that your money works even harder for you.

There are a number of business saving accounts that you can use which rack up interest a lot quicker than their personal banking equivalents. You may not make a lot more money but if you have a run of profitable work, leaving a lump sum to accrue interest over a period of years can be a smart way to protect yourself in lean times.

You also might consider working in a different way than you’re used to. If you always look full-time gigs that last for a short time, you might consider a part time contract that goes on for a longer stretch. This way you’ve got some money coming in but also time enough to search out other revenue streams or catch up on some professional training or career development.