Going self employed, basic earnings question

cornholio

Hi all

Considering going self employed as a contractor. I've been offered a contract on circa £31 an hour for a year. The recruitment guy had given me some figures on monthly take home pay, but I'm always suspicious of them not quite telling me the truth.

Could someone give me a basic overview of earnings for that hourly rate, say based on 40 hours a week and 48 weeks a year please.

I know it's more complicated than this with dividends, payments as salary etc, but I want a idea of how much this would actually pay.

Many thanks
Stu

aggypanthus

Thats £1,240 a wk..x48 is 59,520 a yr. But I gues you can work that bit out.
The deductions depend on your tax code.

can you compare with recent salary?

cornholio

Sorry, should have said this would be me as a limited company, so not a straight comparison with what I pay income tax wise now,?

agrinnall

Let's say you go limited company and you pay yourself the entire amount as salary.

Weekly earnings = £1240
Annual earnings = £59520

You don't need to register for VAT as you're below the limit (although you might want to consider doing so anyway) so we'll ignore that.

We'll assume that you do all your company accounts yourself so there are no accountancy fees, just small amounts for filing with Companies House - just checked, £13 for WebFiling, so we'll ignore that too.

From this you would have to pay employer's NI, employee's NI and income tax.

Employer's NI works out to about £80 a week or £3840 for the year.

That leaves taxable pay of £59520-£3840 = £55680.

Put that into an online calculator such as The Salary Calculator and assuming a tax code of 1000L it spits out Employees NI of £4345, tax of £11899 and take home pay of £39435.

You can almost certainly take home more than that by using legitimate tax avoidance measures.

Hope that helps.

TheCyclingProgrammer

cornholio wrote: »

Sorry, should have said this would be me as a limited company, so not a straight comparison with what I pay income tax wise now,?

Yes, as your thread title says self employed. You won't be self employed, you will be a company director.

Is the contract inside or outside IR35?

If it's not, then your gross billings will be as above. Let's call it a round £60k to keep it simple.

From is you need to deduct your expenses. This could include: salaries, employee expenses (including business travel, accommodation and subsistence), equipment, accountancy fees, certain business insurances etc. This is not an exhaustive list and I'd recommend talki to your accountant about what you can and can't claim.

If you have no other income for the current tax year, then in most cases it's tax efficient to pay yourself a salary up to the personal tax allowance: £10k. There would be no income tax, a small amount of employees NIC and no employers NIC due to the current £2k allowance.

This salary, plus your other business expenses, will reduce YourCo's taxable profit. Say you take a £10k salary, and incur £5k a year in other expenses. This leaves you with a taxable profit of £45k.

You pay corporation tax on this at the small companies rate of 20%, leaving you with £36k in retained profit. You can take as much of this as you like as a dividend (assuming you are sole shareholder) although it would be prudent to leave a certain amount of profit in the company for times when you don't have a contract (this is your "warchest").

You can take dividends up to the higher tax rate threshold without incurring any further income tax. The effective tax rate on any dividends taken above the higher rate threshold is 25%. However you have to account for the 10% tax credit on dividends by "grossing up" the amount you actually take when considering your taxable income.

You can earn a further £31865 before paying higher rate tax. This means you can draw (31865*0.9) = £28678 in dividends without paying any further tax, giving you, with your salary, a total take home of £38678 after tax. I'm ignoring any expenses payments on the assumption that a) they are all tax deductible and b) simply reimbursing your out of pocket costs anyway.

If you wanted to take all of your net profit out of the company, then the remaining £7322 would be taxed at 25%. I'll let you work out how much this would add to your overall take home.

HTH.

TheCyclingProgrammer

Oh, and a word of warning. A reasonable take home percentage when operating through a limited company is around 75-80%. Beware of any company that claims they can increase your take home rate to 90% or more. Almost certainly a dodgy tax scheme that is destined to fail.

Make sure you know about IR35 because if your contract is caught then you have to effectively pay all of your income from that contract as PAYE, with 5% allowance for expenses.

cornholio

Thank you for your replies, that's extremely helpful.

agrinnall

blondebubbles wrote: »

Wouldn't employers NIC be £150 per week?

£1240 - £153 = 1087 x 13.8% = £150 or £7200 for the year.

You could be right, I used the primary contributions table for category D, but if it's actually secondary contributions then the majority of earnings (although not all) would indeed be at 13.8%. No idea what the difference between primary and secondary is.

http://www.hmrc.gov.uk/payerti/forms-updates/rates-thresholds.htm#1