Tips for starting out as a contractor with a limited company
Updated: Feb 7, 2020
10 tips for starting your limited company as a contractor
1. Invoice on time
If you get a 12-month contract and you’re expected to invoice monthly, make sure you invoice on your last working day of the month. If you’re coming from a PAYE job, you’ll be used to getting regular monthly payments so try to encourage this when contracting by invoicing on time. It’s probably a good idea to prepare the invoice in advance so it’s ready to go at the end of the month. If you know you’ll be invoicing a set amount, you could use invoicing software to schedule a monthly invoice to reduce your admin time.
2. Make sure you're paid as soon as possible
As a contractor, relying on the income to live off, you shouldn’t be expected to give 30-days before your invoice is due so if your contract doesn’t specify, use 7-day terms. Some clients run monthly or bi-weekly pay-runs so they won’t be able to pay you on time with 7-day terms but this is only usually the case with very large organisations. If you’re not paid by the due date on your invoice, chase your client for payment with a polite email to the department that deals with paying contractors and this can often prompt a payment.
3. Avoid procrastination
Procrastination is often overlooked, especially for those who have worked in offices for years and then decide to work from home as a contractor. People in these sorts of situations often find themselves doing household chores, taking 2-hour lunch breaks or walking the dog and before you know it, it’s 6 pm and you’ve barely started work. If at all possible have set working times and more importantly, set breaks. It can also help to have a clean and tidy workspace that is only used for work so that when you’re in this space your subconscious knows its work time.
4. Take time off
The opposite side to procrastination is over-working and this can be just as common and just as detrimental. The ability to do an extra hour or two after dinner should be used for emergencies when you’re up against a tight deadline and not feel like an obligation. One of the most popular reasons for going contracting is to improve work-life balance but many of us end up working 60+ hours because there’s work to be done but this is rarely sustainable. Mental and physical health can deteriorate quickly due to overworking and burnout can lead to extended periods off sick with no sick pay.
5. Be active in your industry
Being active in your industry is important not only for getting work but to combat the isolation that contracting can sometimes create. People rarely realise the benefits of working with others until they go out on their own and after the novelty of being able to work exactly how they want wears off, loneliness can creep in. Being active could mean regularly attending conferences, spending time on LinkedIn, going to a regular networking event or just meeting old colleagues for coffee or a pint. You’ll be surprised at how much regular interaction can benefit you as a contractor.
6. Get an accountant
If you have a limited company, you should have an accountant even if you’re capable of doing it yourself. Tax law is forever changing, accounting standards can be very complex and the plethora of thresholds for you and your business often change on an annual basis so keeping up with these changes is highly unlikely to be a worthwhile use of your time. An accountant should be an asset to your business that saves you time and money as well as making sure deadlines are met and tax is paid.
7. Remember that you and your business are separate
One of the most common mistakes by first-time directors of limited companies is blurring the lines between the business and themselves. Even if you are the only person involved in the business and you market the business as you, the company is a separate legal entity. This means that the business is paid by the client not you and that money belongs to the business so to access it you’ll need to pay a dividend, set up a payroll or take a loan from the business. The business should have its own bank account and it shouldn’t be used for any non-business payments.
8. Try to anticipate future tax bills
When your first invoice is paid as a contractor it’s tempting to take out a significant portion of it and start taking advantage of your new day rate but you always need to factor in tax before taking money out of your business. If your VAT registered then 20% of your income is likely to need to go to HMRC within a few months and then you’ll pay 19% of your profits in corporation tax so make sure you have enough money in the business bank account to cover future bills. Using software like FreeAgent can be invaluable for this type of issue as it will keep a running balance of the taxes the business will need to pay so you don’t have to wait until the year-end or the VAT return to be prepared before you know how much tax you’ll need to pay.
9. Keep good records
In most scenarios, records are never needed after the accounts are prepared for a period but it’s still vital to keep records for several years after the accounts have been filed. HMRC have the power to query past issues and request records for periods that ended 5 years ago and if you don’t have evidence to back this up, you could be in for significant penalties and back-taxes. You also need to keep in mind that you’ll prepare accounts for your business at some time during the 9 months after the period ends so you might be dealing with transactions that took place more than 18 months before so good records are essential for ensuring your accounts are accurate.
10. Remember to value your time
When contracting, there will often be unbillable time spent on your business that should always be taken into consideration. If you’re charging your client £500 for a day’s work you’re effectively saying your time is worth £60-£70 per hour so if you then go home and spend 2 doing invoicing and bookkeeping you are then one of the most expensive bookkeepers in the country. If there’s work that can be outsourced for considerably less than you charge your client, why do it yourself? If you’re not comfortable outsourcing, at least invest in software that can automate or speed up the job to maximise your productivity and ensure you’re using your skillset effectively.