Wealth Management: Effective Solutions for Contractors
It is perhaps an understatement to say that financial regulations have undergone massive changes within the past few years. With IR35, of course, some contractors are finding that they are required to pay more taxes due to having contracts that fall outside of the IR35 legislation. We must also consider changes to dividends, many of which are no longer tax-free. A common problem that contractors are up against today is quite simply that they’re taking home less money for the contracts that they’re working on.
This has sparked a new area of interest for contractors, one that may not have been looked into so much in the past: wealth management. In a bid to bridge the gap, many are considering more effective ways to handle and manage their money, ensuring they’re getting the most financial value from their contracts.
The Great Bank Debate
Once upon a time, the obvious answer would have been to simply hold any excess cash within the business. However, this is no longer a viable option for many. Consider that, in August 2018, inflation was at 2.7% (above the Government target of 2%), while the Bank of England base rate was at just 0.75%. This means that contractors would experience significant loss over time, with cash value remaining almost stagnant while the inflation rate continues to climb and climb. Imagine if a contractor working in 1950 kept hold of £10 that they had earned… it would be worth less than 50 pence by today’s standards!
So what are some sensible options for contractors?
Potential Investments for Contractors
A report by InTouch Accounting finds that the following are amongst the most popular options:
- Buy-to-let investments (through the company, or through a separate limited company)
- Trading and forex
- Investing in other aspects of business, such as growth and development
However, another popular option is to invest in your own future by contributing towards your personal pension. Tax relief on pension payments makes this a good choice, although it’s important to remember that any money paid into a personal pension pot will remain inaccessible until you reach 55. Therefore, it’s essential to not ‘put all your eggs in one basket’, so to speak. It is necessary to ensure that your company has accessible cash, should you experience any cash flow problems further down the line.
This is where there will always be a challenge. While contractors may understand the many different investment opportunities available to them, and the best choices they can make for their situations, finding the right balance is tricky. On the one hand, there's no point leaving cash in the business to be taxed if it is truly surplus to requirements. On the other hand, job security is one of the main risks of contracting. Will your limited company need this currently excess cash to be available in the future?
It’s an area where it can be impossible to know the exact answer, or to know exactly what impact today’s financial decisions will have upon your future circumstances. However, you can greatly reduce the risk of making investments by talking to an expert who can guide you through what’s best for you.