NW take home pay calculator

[Newbie Simon]

Can someone please explain to me why the more expenses you put in the more your take home pay will be?

https://www.nixonwilliams.com/net_pay_calculator.asp

[malvolio]

Can someone please explain to me why the more expenses you put in the more your take home pay will be?

https://www.nixonwilliams.com/net_pay_calculator.asp

Legitimate business expenses are not treated as income and are therefore income tax is not charged on them, the logic being that the personal money you used to pay for the "whatever" has already been taxed. Less tax equals more net pay.

However, two problems: firstly they must be legitimate business expenses, secondly you usually need to have spent the money. If you make a profit on expenses then someone is doing something wrong. For comparison purposes, ignore expenses.

This is a basic question though; have you tried reading the guides we keep banging on about?

[northernladuk]

I guess you are in the early days of contracting looking at these? You are going to need an accountant if you start so why not give NW a call so they can explain. They might answer a host of other questions you have in the same call. They post on here and are very helpful. You will get the answer to your question on here but a short call with NW will provide you with a better understanding of the whole situation.

You could also try downloading the SJD spreadsheet which is free if you register and have a play with that plugging different numbers in to see how the numbers change and affect the outcome.

[Newbie Simon]

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

[mrv]

Yes, you pay tax only on earnings - expenses, so if you somehow manage to spend everything you earn on legitimate expenses, you will pay no tax - but at the same time, you will have no money anyway. Check with your accountant what you can claim to minimise your tax bill.

I remember there was a guy a while ago who got very excited about the reclaimable expenses idea and planned to get the most expensive hotels, meals etc available to drive reclaimables up, but then got very upset upon finding out no one is about to reimburse him on those.

[JB3000]

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

If you pay for business expenses via your personal bank account (let says £300/month) you can then transfer £300/month from your business account into your personal bank account. In other words, your business can reimburse you (i.e. pay you back) for paying for business expenses out of your own money (rather than using the company's money). This pay back or reimbursement is obviously not income. For example, if you spend and therefore lose £300/month on business expenses that you have paid from your own pocket, and then reimburse yourself £300 from the company you are no better off. You won't be able to use the £300/month you get from your company bank account to pay for your mortgage/rent and other personal bills because you are using that £300/month to pay yourself back for business expenses. Obviously, the more expenses you pay on behalf of your company the more your company will owe you and the more you will be able to take from the company. However this is not income as you are just getting paid for what you have already spent.

From your example above, with expenses of only £5,000, you will get more income (i.e. £36,000) compared with £10,000 of out of pocket expenses (where you will only get £32,000 of income). This is because the more expenses you have the lower your profit will be.

However it is best to put through all your out of pocket business expenses through the company in order to ensure that you are getting properly reimbursed for any expenses that you are paying personally. This will ensure that you do not end up worse off. For example, if you spent £300 on business expenses and did not claim this back from the company you would be £300 worse off.

Putting through the expenses will also reduce your corporation tax liability. Any money left over can then be taken as a dividend. The greater the amount of dividends you take from the company the greater the chance of you ending up in the higher rate personal tax bracket and having to pay income tax when you complete your self assessment questionnaire. Consequently the more money you can get out out of your company bank as reimbursement of expenses (as opposed to dividends) the better. Assuming your contract is outside of IR35, reimbursement of expenses, a small salary (e.g. £10,000) and larger dividends (e.g. £28,678) are the best way of extracting money tax efficiently from your company bank account. The salary and dividend figures I have quoted depend on a very simple tax position so you may what an accountant to check how any other income, tax reliefs, capital gains, etc that you have received during this tax year will interact with the figures I have quoted.

[northernladuk]

Yes, you pay tax only on earnings - expenses, so if you somehow manage to spend everything you earn on legitimate expenses, you will pay no tax - but at the same time, you will have no money anyway. Check with your accountant what you can claim to minimise your tax bill.

I remember there was a guy a while ago who got very excited about the reclaimable expenses idea and planned to get the most expensive hotels, meals etc available to drive reclaimables up, but then got very upset upon finding out no one is about to reimburse him on those.

Lol I remember that thread. Just bear in mind anything you buy through the company is only effectively 20% cheaper. It's not free as it eventually comes out of your pocket.

[mudskipper]

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

Perfect.

Just remember you will have needed to spend the expenses, so the actual money left to blow on drugs and hookers is

£41K - £5K = £36K

or

£42K - £10K = £32K

So the more you spend on expenses, the less tax you pay, but the less you spend the richer you are.

[JB3000]

Perfect.

the less you spend the richer you are.

Very true. If you reduce your spending but keep receiving income your personal bank balance will quickly increase.

However if you are going to spend money on expenses (out of your own pocket) that are wholly and exclusively for business purposes it is best to claim that through the business so you are not worse off, and so that you reduce your corporation tax liability.

[Newbie Simon]

Perfect.

Just remember you will have needed to spend the expenses, so the actual money left to blow on drugs and hookers is

£41K - £5K = £36K

or

£42K - £10K = £32K

So the more you spend on expenses, the less tax you pay, but the less you spend the richer you are.

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.