The contractors’ warchest
Most Limited Company contractors or freelancers build up a warchest, to ensure they are covered financially for any breaks in contracting. Having provisions for such an occurrence makes perfect business sense, but what happens when your warchest is a rather substantial size? Should you spend or save?
You’ve just started contracting – what next?
When first starting out in contracting there are lots of new things to get to grips with, most of which your specialist contractor accountant can advise and support you on. But when it comes to building your warchest, this usually happens in your second year. There is no one-size-fits-all answer to this, as everyone’s needs and future plans are different.
So to prepare you in your first year of contracting, we’d advise ensuring there’s enough money in your business bank account/s to pay all liabilities (such as taxes due) plus your personal salary and dividends. Once you’ve established you can do this (with profits left in your company) then it’s time to consider your warchest.
What are the options?
Once you’re in your second year and have reached your ISA allowance of £15,240 it’s time to consider what to do with the profit left in your company.
One option is to leave it be for a rainy day or break in contracting. Whilst this is strongly advisable for all contractors who are planning to remain in contracting for the foreseeable future, it’s not always the right option for everyone, especially if you’re close to retiring or returning to permanent employment for good.
Another option is to take money out of your Limited Company as dividends over the higher rate.
Whilst our team of expert contractor accountants can advise you from an accountancy point of view, once you have made the decision to take money out of your warchest, we strongly advise that you appoint an independent Financial Adviser. Here at Intouch Accounting, we recommend Penny Matters, who can provide you with tailored advice on mortgages, pensions, life cover and much more.
Set a target to work towards
A good starting point with your warchest is to consider a target you’d like to reach, then ensure you get there before deciding what you’re going to do with your funds. It’s very easy to see the amount steadily getting larger and starting to let your mind run wild, but ensure you speak to your contractor accountant about a realistic financial goal and how you can reach it.
Remember! Your financial obligations as a Limited Company contractor must always come first, so ensure your ducks are in a row before deciding on what to spend your profits on.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.