NW take home pay calculator

[Contreras]

So the expenses are fully reclaimable thru a limited company?

Say I earn £50k a year and have £5k of expenses my take home pay would be 50000-5000-20%=36000+5000=approx. £41k ?
and if I had 10k of expenses my take home pay would be 50000-10000-20%=32000+10000=approx. £42k

Almost, but not quite.

1) You'd normally pay salary to a certain threshold without incurring tax or NI. Unlike expenses, salary is real cash you get to keep. It reduces CT in the same way as your calculation above.

2) If company turnover was higher than your example (or if you had other significant income during the tax year) and you decided to draw all profits then there would be a personal tax liability on the dividends once your gross income enters the high rate band.

That should give you a fair estimate of 'take home'. An accountant will be able to advise for your personal circumstances.

To be more precise, some factors worth mentioning that would muddy the calculation (all discussed elsewhere and available to search):
- accountants fees obviously count as expenses but not to your pocket!, and CT deductible as above
- some expenses, like 45p/mile and the use of home allowance, *are* real cash in pocket
- VAT flat rate scheme would normally generate a small extra profit (few percent)
- minimum salary + dividends approach assumes contracts are outside IR35
- most efficient salary may be above the personal allowance, i.e. tax/NI to pay, but not as much as the CT saved
- gross income from dividends is calculated as net/0.9, relevant for the point at which you hit the high rate band
- you can decide to leave retained profit in the company to be drawn when it's more efficient to do so

[SpontaneousOrder]

Thanks for your replies

I think I get it now the NW calculator is a bit misleading to me as the more expenses you enter the more take home pay you will receive but you have to pay the expenses out of your own pocket so the true figure would be to minus your expenses of the take home pay.

It depends how you look at it. For example, I used to have to pay for train fare to get to work anyway as a permie - so now that it's a legit business expense, It means I'm richer than I would have been if I just paid for the train fare, as I did as a permie, without expensing it.

Also, as a software professional, I used to need a computer at home as a permie. Now it's a legit business expense so by plugging it into the calculator as such, I'm better off.

By that rationale, my retention as a percentage is better than if I bought the train fare and computer personally (because it reduced my business taxes).

[PerfectStorm]

Thanks for your replies

I think I get it now the NW calculator is a bit misleading to me as the more expenses you enter the more take home pay you will receive but you have to pay the expenses out of your own pocket so the true figure would be to minus your expenses of the take home pay.

Exactly - it has to be stuff that is both legally allowable, and that you wanted to buy anyway.

A perfect example is lunch - you're probably used to spending a fiver or so at lunch every day right? Well when contracting, you can spend that money pre-tax - so your amount of income left to be taxed on is your income less that £5 (and any other business necessary things you buy that year).

If you choose to spend nothing on your lunch, you're still better off overall.

If you choose to spend more than £5 when you otherwise wouldn't, you'll either break even on the tax saving or just be paying more money. Your income will be taxed less, but you'll also have just bought a really expensive lunch so you kinda lose out depending on your point of view.

The "It's 20% off!" thing is confusing until you realise that every expense lessens the amount of money you'll be charged 20% on. So if you charge £500 a day for a 20 day working month, your income is 10000. Spend a fiver on lunch every day (or any other VALID business expense - refer to accountants/hmrc for that) and you now have a £100 expense. Take that away from your income and you're now being charged 20% corporation tax on £9900 rather than £10000. The odd big thing you buy - necessary for the business - such as a PC or a monthly travelcard are great examples of things that can bring this bill down further whilst remaining "things you wanted to buy anyway".

[malvolio]

Which is all well and good apart from a couple of extra points:

• Lunch isn't always claimable, especially if you're commuting rather than staying away.
• In fact having YourCo does not give you carte blanche to charge stuff; HMRC get sniffy if you claim things you would have had to buy anyway - like lunch...
• The 24 month rule has an impact
• If you're sensible and YourCo pays business expenses rather than spending your money and reclaiming it, you won't see a direct benefit (OK, YourCo profits go up slightly meaning you can take more out) since you won't be spending anything anyway
• Expenses are just that: expenses. They are not income. Don't get them mixed up, and
• Don't get your money and YourCo's money mixed up either.

[SpontaneousOrder]

Re saving 20% - If you're a higher rate tax payer then am I right in thinking it's be a 40% saving? Or have I missed something?

[malvolio]

Re saving 20% - If you're a higher rate tax payer then am I right in thinking it's be a 40% saving? Or have I missed something?

Lots. For one thing, you don't pay 40% on all your income, do you...? And it's YourCo making the saving, by offsetting expenses against CT. All you're doing is taking back money you've spent already out of income that's already been taxed; which is why you don't pay tax on it again (unless it's not a genuine business-only expense in which case the payment is a taxable benefit in kind).

[mudskipper]

Lots. For one thing, you don't pay 40% on all your income, do you...? And it's YourCo making the saving, by offsetting expenses against CT. All you're doing is taking back money you've spent already out of income that's already been taxed; which is why you don't pay tax on it again (unless it's not a genuine business-only expense in which case the payment is a taxable benefit in kind).

But yes, for stuff you would buy anyway as a permie, such as your train ticket, the effective saving to you (rather than yourCo) is higher rate tax (+NI etc) so well over 20%.

[mudskipper]

Which is all well and good apart from a couple of extra points:

• Lunch isn't always claimable, especially if you're commuting rather than staying away.

For a normal working day, if you're working away from home and inside 24 months, lunch is claimable.

There seems to be a lot of misinformation about this.

[Contreras]

For a normal working day, if you're working away from home and inside 24 months, lunch is claimable.

There seems to be a lot of misinformation about this.

... generally from the same source.

[malvolio]

Perhaps you two should have a read of this list. Other examples are available...

HTH