How to budget as a contractor

Budgeting as a contractor

Having good organisational skills is a must-have for any contractor, especially when it comes to budgeting.

By creating a budget, you’ll be able to keep track of your cashflow – you’ll then know how much money is coming in and going out, you can monitor expenditure to make sure you don’t spend beyond your means and you’ll know how much there is to put aside for emergency funds and investments.

Why should I budget as a contractor?

There are many reasons why it is wise to create a budget as a contractor, for example:

• Self-employed monthly or annual income is unpredictable, meaning you need to prepare for quiet work periods.
• You need to ensure you’re managing personal and business expenses.
• Managing taxes is one of the biggest tasks for a contractor – knowing what you owe and when it needs to be paid is something that organised budgeting can really help with.
• It’s something that often gets forgotten about, but retirement planning is vital for contractors; there are no pension schemes in place for the self-employed and they don’t have an employer taking care of this for them. By knowing where your money is going and what’s being put aside for everyday budgeting, you will then know how much can be put toward a pension pot.

What do I need to consider when creating a budget?

As discussed previously, a contractor won’t know exactly how much money they’ll be taking home month-to-month, however, if it is possible, it helps to calculate your minimum or average monthly income so that you have an idea of what you’re working with when it comes to budgeting.

It’s worth considering separating your personal and business money into different bank accounts so that you can get a clear picture of your finances and don’t confuse business outgoings with personal ones.

A limited contractor has to set up a separate business account anyway, but a sole trader might want to do the same.

Your tax liabilities will differ depending on whether you contract as a sole trader or limited company contractor, so you need to find out which taxes you’ll need to pay. An accountant can help with this and ensure you’re paying the correct taxes on time.

It helps to put aside a percentage of your pay each month so that you have it ready for paying your self-assessment tax return on the 31st of January each year.

Expenses are your friend when it comes to budgeting, as claiming back on business expenses can help to reduce your tax bill. So, while you’ve been putting money aside to pay for taxes, it’s likely you’ve put aside more than you need, giving you extra income.

Take a look at our What Expenses can I Claim as a Sole Trader? page for more information on this.

An extra tip when it comes to budgeting, is to always slightly overestimate your outgoings and underestimate your income, that way you’re more likely to have additional money to help towards unexpected costs or to squirrel away into savings for emergencies.

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