Top Accounting & Tax Tips for Contractors
Working as a Contractor presents some unique challenges as well as some great benefits.
The main advantages of contracting include the independence and flexibility it offers, being
your own boss and good pay. But Contractors also face some challenges that people in
conventional employment don’t have, including the responsibility of managing your financial
and tax affairs as well as running your business.
Read on for our accounting and tax tips for Contractors that will help you work smarter and
maximise your success.
Separate Your Business & Personal Finances
One of the first things you should do when you start contracting is to open a dedicated
business bank account. This is a legal requirement if you contract through a limited company
but isn’t mandatory if you operate as a sole trader. A sole trader could use their personal
bank account for business purposes, but this is not advisable.
When you have a dedicated business bank account you create a clear distinction between
your business and personal finances. This provides clarity and makes it far easier to keep on
top of your expenses, invoices, incomings and outgoings than if you had your personal and
business transactions mixed together in the same account. A business bank account will
massively simplify accounting and admin tasks, especially when it’s time to submit your self-
assessment tax return!
Ensure Accurate Record-Keeping
As a Contractor, it’s vital that you maintain accurate and up-to-date records. You should
carefully track all your income and expenditure and maintain a record of all receipts,
invoices, bank statements and any other relevant financial documentation for a minimum of
6 years as per HMRC guidance. It’s also a good idea to categorise all your expenses and
regularly reconcile your bank statements with your accounting records.
Keeping comprehensive records and ensuring your paperwork is tidy and organised is
essential to effectively manage your business. It will save you a lot of time, not to mention
stress, when you’re completing your tax returns. It also increases the chances of submitting
everything to HMRC error-free and avoiding any fines, penalties or investigations.
Take Advantage of Automation
Depending what sector you contract in, automation is something that can help you work
more efficiently and accurately. The same principle applies to your tax and accounting
Manually keeping financial records in spreadsheets is not advisable or feasible in the long
term even if you don’t have a lot of information to input. Your records will grow in size and
complexity over time, so you don’t want to end up having to input thousands of entries or
waste time searching for a particular record.
Submitting tax returns is also a lot more difficult this way, and you’re more likely to make
mistakes. Not only that but if you become VAT registered, it’s now mandatory to keep digital
records in line with the roll out of Making Tax Digital (MTD) and file VAT returns
electronically through MTD-compatible software such as FreeAgent.
By using dedicated accounting software, such as FreeAgent, you can also automate your
bookkeeping and many other laborious admin tasks. This will save you a lot of time and
significantly reduce the chances of errors in your submissions.
Budget For Your Tax Obligations
As a Contractor you have the obligation to submit your tax returns, but your tax
commitments don’t end there. Unfortunately, you must also pay what you owe by the
relevant deadlines. It’s important to take your tax liabilities into account when you create
your budget so that you don’t have to scramble to find extra funds to cover what you owe.
Estimating your tax liability accurately is key which includes understanding the income tax
and NIC rates and deductions that are relevant to you based on your projected income. This
will give you a budgeting baseline and you can then set aside a percentage of your income
which is generally 20% – 30% for Contractors.
Don’t Miss Your Deadlines
As well as budgeting for your tax liabilities, it’s important for Contractors to stay on top of all
key dates including the self-assessment tax return and corporation tax deadlines, so that you
pay on time. The last thing you want is a late submission penalty from HMRC, especially
when it’s so easily avoidable.
Organisation is key and as tax deadlines generally stay the same you won’t have to meet
different submission dates each year which is a big help in terms of planning and continuity.
Keeping organised records relating to your expenses, income and tax-related documents is
useful. You should diarize all submission deadlines and plan ahead to allow sufficient time
Regularly Monitor Your Finances
There are many benefits of investing some time to regularly monitor your company finances.
Keeping track of your income, expenses and cash flow gives you a clear and up-to-date
overview of the financial position and health of your business. Trends, patterns and potential
issues can be identified and you can make informed business decisions based on your
current financial situation.
This will also help with budgeting and expense control as well as payment collection. Maybe
you will notice areas where you’re overspending and can implement some cost-saving
measures. There can also be a benefit in terms of fraud prevention if you notice any
irregularities or unauthorized transactions in your numbers. Ultimately, keeping abreast of
your current financial position helps to provide a solid foundation for long-term success.
Be Prepared For The Unexpected
As well as budgeting accordingly for your usual outgoings, it’s prudent to keep some funds
aside in case of any unexpected expenses. It’s inevitable that at some point things won’t go
to plan and having a financial safety net in place can be a lifesaver. For example, if you work
as an IT Contractor and your computer fails, you will have the necessary funds available to
replace it and keep working without it having a negative impact on your service level and
business. A monthly standing order to pay into a savings account is a great way to do this.
Contractor Insurance can also provide protection and peace of mind should the unexpected
happen. If you’re unable to work due to disease, sickness or injury, Contractor sickness
cover will provide you a monthly benefit so you can cover your costs until you recover and
can get back to work. Professional Indemnity cover will protect your business if a client takes
legal action against you for losses caused due to an error by your business.
Have The Right Operating Structure
There is a trade-off between sole trader and limited company operating structures with
positives and negatives to both. Sole traders face less regulatory and compliance
requirements so there’s less admin burden which helps save you time. But you are also
personally responsible for the debts of your business so your personal assets such as your
house and investments can be at risk if your business encounters financial difficulties and
If you’re a Contractor operating through a limited company, you don’t face this threat. Your
limited company is a separate legal entity to you which means that limited liability applies,
and creditors can’t pursue your personal assets. If you contract through a limited company,
you also have more control and flexibility in terms of how you are paid. Incorporation
presents opportunities for increased tax efficiency which means you can structure your
remuneration through a combination of salary and dividends which can result in increased
take home pay.
The majority of Contractors operate through a limited company, but everyone’s
circumstances are different and the decision to incorporate should be based on the current
position and needs of your business as well as your future aspirations.
Charge Appropriately For Your Services
Whether you charge by the hour, by the day or a fixed fee for each contract is dependent on
the type of work that you do as well as client preference and industry norms, so there are
various factors to consider.
If it’s likely that a contract will overrun or require a lot of overtime, you should charge by the
hour as you’ll potentially lose money if you charge a day rate or fixed fee. You don’t want to
be working more hours than you’re being paid for. Charging by the hour is more suitable for
contracts that have an uncertain scope or varying levels of complexity as this makes it
difficult to accurately estimate how long they will take to complete.
Charging a day rate is more common for contracts that will take multiple days or require
onsite work. It provides a simple pricing structure for your clients and, provided you
accurately estimate the days required, will be profitable for you.
Charging a fixed fee per contract is appropriate when the scope of the work is fairly rigid and
well defined. This will alleviate cost concerns for your clients as they know the exact amount
they will be paying for your services, but you should carefully assess the requirements of the
job first so you don’t undercharge for your time.
Set The Right Rates
One way to increase your take home pay each month is to increase your rates. You’re not
obliged to keep the same starting rates so don’t be afraid to ask more of your clients or
It’s understandable that you could be concerned about raising your rates if the increased
cost reduces the chances of winning new work. But you’re in business to make money and
you need to be working on contracts that are profitable. Your rates should also reflect the
ever-increasing cost of living.
It’s also important for Contractors to value themselves. You have key skills that are in
demand that your clients pay you for, so don’t be afraid to set rates which reflect that. If your
rates are too low, you may not make enough money to cover your costs and save for
retirement. The key is to negotiate firmly, but also strike a balance to make sure that your
rates are both realistic and competitive, but also profitable. It’s beneficial to frequently
evaluate how much you charge.
Appoint a Contractor Accountant
Appointing a Contractor accountant is one of the best decisions you can make as a
Contractor. The benefits of working with an accountant are numerous. For a monthly fee all
your tax and financial affairs will be taken care of which gives you peace of mind and will
save you heaps of time which can be used to focus on business growth. You’ll receive
support and advice including how to leverage tax efficiencies and you can be confident that
your tax submissions will be with HMRC on time and error-free.
Finding the perfect Contractor accountant doesn’t have to be difficult. Gorilla Accounting is
the No.1 rated Contractor accountancy firm with a service tailored for Contractors across all
sectors. For a great value fixed fee of £95 + VAT per month for limited companies and £45 +
VAT a month for sole traders, all your accounting needs will be taken care of. You’ll also
benefit from full FreeAgent access at no extra cost, guaranteed same day response and
unlimited support and advice from your own dedicated accountant.