How to manage inconsistent income as an IT contractor: top 10 hacks

Any serious-minded worker in the UK tech sector who has considered ‘going it alone’ as a freelancer or ‘making the jump’ from ‘perm’ to ‘contracting,’ will recognise some of the daunting aspects of working independently.

Up there with the most harrowing of them all is how you go about managing inconsistent income as an IT contractor, writes Christian Hickmott, managing director of Integro Accounting.

In short, how do you manage the inevitable peaks and troughs of freelance earnings?

Why bother with the inconsistent income of IT freelancing?

The truth is that while inconsistency of earnings will always be part of a truly freelance lifestyle, which is underpinned by short assignments secured independently (or with a recruiter’s help), the ups and downs of income absolutely can be managed.

And an added bonus is that a freelance career in technology can be secure, fulfilling and often twice as financially-rewarding! 

Some of the methods available to manage inconsistent income as an IT contractor will very much depend on your own personal circumstances. Others are ubiquitous, however, and can be put to good use by all whether you’re new to contracting or even a veteran.

Managing inconsistent income as an IT contractor: top 10 hacks

Here are our top 10 hacks to shrewdly manage inconsistent income as an IT contractor.

1. Save up a ‘freelance fund’ before you start IT contracting for real

While saving up a ‘freelancing fund’ before you start freelancing and while you’re still in full-time-work may sound as realistic a prospect as an inflatable dartboard, it is still the gold standard option to get yourself started on the right track to successful address inconsistent income as an IT contractor.

This option is risk-free; prepares you for the belt-tightening you may need to do ‘on the job’ as a freelancer, and can even be numerically based on the sorts of roles you expect to secure on a daily or hourly rate basis.

2. Explore other ways to build a buffer (includes Tech Freelancing-Lite)  

Once you’re at the jumping-off point of departing your full-time 9-to-5 job, redundancy packages can be a good way of sustaining your new freelance business.

Or if there’s no such package, and you want to  get coding tomorrow as a freelancer, maybe stay at your parents’ home, or at a friend’s place, to allow you to build up a buffer. Don’t be afraid to say to friends and family: “I can’t afford that right now; I’m saving to start a freelance technology business.”

Another option to build a buffer before you freelance fully, is to dip your toe into freelance waters, whereby you take on a few freelance gigs as a side-hustle, perhaps using project websites or freelance skills marketplaces, rather than the services of a fully-fledged recruitment agency.

Before you reach out to find an independent project or posting however, be sure to check your contract of employment to ensure it is compatible with your existing duties and permits such additional work ‘on the side.’

3. Set up a budget and double-check it’s realistic

With the key task of setting up a budget, there really is no point adopting an ostrich philosophy. In other words, don’t bury your head in the sand!

Sit down with a calculator to work out your outgoings for a full year, and then -- just as important -- work out the minimum amount of money that you need to earn to get by.

When envisaging yourself as an IT freelancer on a budget, don’t forget things you may be unfamiliar with or will likely just do more of. For example, those extra coffee shop treats, or remote lunches -- now you won’t be in your employer’s canteen for example, can all add up fast!

4. Set a small, single, reward budget

We also encourage that you budget enough money so that you can reward yourself from time to time.

Yet after this single allowance, try to be disciplined for the entire duration of the early months. Or at least, have only one reward point on a three-month contract – still the staple length for contract IT assignments.

5. Practice discipline even when you’re ‘in the black’

Let’s say you have a bumper month at work, by getting paid an ‘early completion’ fee or you earn a little extra due to meeting a project milestone ahead of schedule. Well, make out like you didn’t!

What we mean here is that as soon as you enter the black, practice discipline and don’t spend the extra incomings; save it for the leaner months and stick to your budget.

Keep in mind, once you have a year or two under your belt as an IT freelancer, you will have a good feel for the ebb and flow of your business, and you can start to enjoy the fruits of your labour with less rigidity.

6. Know the 18:21 rule

A bit like tax calculations, self-assessment dates set by HMRC are quite straightforward – assuming, that is, you’re a seasoned IT freelancer or a contractor accountancy firm like us!

If you’re neither, then it can be hard to get your head around the fact that you can be building up a tax liability for up to 21 months before paying anything, and then you must pay HMRC up to 18 months of that in one lump sum.

So, find an accountant that specialises in computer industry freelancers and small tech businesses. You want someone who can guide you through what may seem like anomalies which can make managing inconsistent income an extra bind.

For example, if you’re going to be freelancing in IT as a limited company, did you know that your corporation tax bill is going to be due at the somewhat unconventional-sounding deadline of nine months and one day after the end of your accounting period?! It’s another tax ‘quirk’ to factor in if you want to shrewdly manage inconsistent income as an IT contractor.

7. Set your prices right from the start

To set the correct pricing strategy as a freelance tech worker, you’ll need to do a little bit of market research.

First, you want to see what your ‘market rate’ is; and then find out how much your competitors’ rates are.

Then, last but not least, it’s important to look at what the price or fee needs to be for you, in terms of profitability.

One of the biggest pitfalls we see with small companies and one-person consultancies is to assume multiplying the headline rate by time-worked, perfectly arrives at your target income.

In your own freelance business (unlike working as an employee for someone else’s business), you will spend quite a bit of time on administrative tasks. In addition, you will need to make sure that you allow time for marketing and networking activities, so that you can keep building your pipeline.

As they say, ‘Time is Money’, so don’t set a price in stone until you’ve factored in the non-financial outlays that you’re going to need to make, to keep both you and your tech business ticking over nicely.

8. Structure your tiny technology enterprise in the correct way

Operating as a sole trader or registering a limited company are the two common options for structuring a freelance business.

The ‘pros’ and ‘cons’ of each freelance structure are a sufficiently lengthy topic for another day! However there are a few key points to consider in any consideration of how to effectively manage inconsistent income as an IT contractor.

A limited company will be more expensive to run as accountancy fees are higher, but being ‘LTD’ does give you more flexibility.

With a limited company, you have the option to save funds from a side-hustle in the business; and only draw down on that as taxable income when you need the funds.

Alternatively, and in the right circumstances (it’s always best to get professional advice on this one), a limited company gives the flexibility of a director’s loan, which lets you smooth out having high income in one tax year followed by low income in the next.

In our experience, statutory maternity pay and parental pay are also better for the recipient, through an incorporated business which you set up with Companies House.

9. Find a freelance community

Working independently as a freelancer is a very different animal to full-time employment. With the latter, your 9-to-5 provides the stability of being on someone else’s payroll, where your pay-check is always consistent, regardless of performance. So almost needless to say, freelancing -- where you may work alone and where you may work under performance-related clauses -- comes with its own challenges.

Unfortunately, when starting out as an IT contractor, many of the people around you may not fully understand the challenges that you are now facing as a freelancer and so it can feel isolating. Potentially opaque terms like ‘take-home pay’ (i.e. what you earn after tax) and ‘director’s loan’ (which we will demystify for Free-Work readers very soon), can add to the isolation!

It is therefore worth seeking out a community of freelancers, whether that’s online or in real life, as they will give you a sense of solidarity.

Remember, there’s lots and lots of freelancers who’ve already gone before you, so tips and tricks to managing inconsistent income efficiently will already be available, and hopefully your newfound friends will be happy to share their wisdom.

10. Consult an accountant

Many accountants offer a ‘free consultation’ to ensure that working with them is going to be the right step for you -- and for them!

If fluctuating or inconsistent income is dominating your concerns, ask an accountant in the free consultation how they plan to assist you in managing income inconsistences which are endemic to freelancing and contracting, but for many, are all part of what makes working for oneself in IT so exciting, rewarding and even potentially lucrative.