Ltd company take home percentage

[jamesrwhitehead]

Hi All,

I know there is a lot of preaching on here that people shouldn't think about contracting in terms of take home, but the fact of the matter is many people have a choice between permanent or contracting, and as such want to know what's best for them.

Having been contracting for a month now and researching it a lot there is a mismatch between the often talked about "70% - 75%" figure, and the figure I have come to the conclusion is possible for me, and I suspect a lot of other people. To take an arbitrary example :-

+ Annual Revenue = £80k
+ VAT Flat Rate addition (6.5%) = £5.2k

= Total Revenue = £85.2k

- Salary = £8k (the tax efficient amount to avoid paying income tax and NI)
- Expenses = £10k (very high commuting and hotel costs)

= Pre Taxable Profit = £67.2k

- Corporation Tax @ 20% = £13.44k

[B]Post Tax Profit = £85.2k (Total Revenue) - 13.44k (Corporation Tax) = 71.76k

Now - given that I am married and I am fully allowed to split dividends with my wife (as I understand it) - I am pretty much able to take home all of the Post Tax Profit as dividends without going into the higher rate threshold.

Finally - £80k / £71.76k * 100 = *** TAKE HOME PERCENTAGE = 89.7% ***

Can anyone help me understand what is wrong with the above and why most people / calculators talk about a take home of 70% - 75%? Even if my expenses above were 0 it still works out at over 85%? Surely any contractor who is married or in a civil partnership, where the other half not working, is in exactly the same situation?

Thanks,
James

[Jessica@WhiteFieldTax]

There is a take home table on my firms website. Of course there are a few assumptions behind it, but the results on £80k with flat rate are:

PSC IR35 caught - 62.7%
PSC outside IR35 single shareholder - 74.8%
PSC outside IR35 with spouse as shareholder - 85.9%

Assumptions embedded around salary level, FRS rate, expenses.

All the calculators will give the same answers if the inputs and assumptions are the same, subject to them being written properly and their sophistication.

Hope that helps.

[TheCyclingProgrammer]

1. Not everybody is in a position to split their income with a partner.
2. Even if they are, it only really works if said partner has low earnings (or is unemployed).

If your spouse/partner is already in a decent paying job, there's a limit to how much you can benefit from share splitting (you could do something like a 75/25 split). If they are already a higher rate tax payer there is zero benefit.

If you're a sole shareholder, the most tax efficient salary is £10k btw, not £8k.

[mudskipper]

+ Annual Revenue = £80k
+ VAT Flat Rate addition (6.5%) = £5.2k

Your flat rate calculation is wrong.

Assuming you're factoring in the 1% discount for the first year to get a 13.5% rate the calculation is as follows:

Revenue - 80k
VAT charged - 16k

Total billed: 96k

VAT paid: 13.5% * 96k = 12,960

So VAT 'profit' (first year) is £3,040

For subsequent years (14.5% rate) it's £2,080

Your accountant should explain this to you.

[jamesrwhitehead]

Your flat rate calculation is wrong.

Assuming you're factoring in the 1% discount for the first year to get a 13.5% rate the calculation is as follows:

Revenue - 80k
VAT charged - 16k

Total billed: 96k

VAT paid: 13.5% * 96k = 12,960

So VAT 'profit' (first year) is £3,040

For subsequent years (14.5% rate) it's £2,080

Your accountant should explain this to you.

Aha yes good point - that certainly accounts for a few percent of the differences in mine and other calculator percentages. Thanks

[jamesrwhitehead]

1. Not everybody is in a position to split their income with a partner.
2. Even if they are, it only really works if said partner has low earnings (or is unemployed).

If your spouse/partner is already in a decent paying job, there's a limit to how much you can benefit from share splitting (you could do something like a 75/25 split). If they are already a higher rate tax payer there is zero benefit.

If you're a sole shareholder, the most tax efficient salary is £10k btw, not £8k.

I thought you'd be paying NICs @ 12% on incoming over £7956 - therefore the most tax efficient salary was to remain below that threshold?

[jamesrwhitehead]

There is a take home table on my firms website. Of course there are a few assumptions behind it, but the results on £80k with flat rate are:

PSC IR35 caught - 62.7%
PSC outside IR35 single shareholder - 74.8%
PSC outside IR35 with spouse as shareholder - 85.9%

Assumptions embedded around salary level, FRS rate, expenses.

All the calculators will give the same answers if the inputs and assumptions are the same, subject to them being written properly and their sophistication.

Hope that helps.

Very helpful and makes sense - thanks Jessica.

[jamesbrown]

I thought you'd be paying NICs @ 12% on incoming over £7956 - therefore the most tax efficient salary was to remain below that threshold?

You need to look into claiming the £2k employment allowance. As stated, for a single shareholder, the most efficient salary overall (accounting for company and personal taxes) is £10k.

For example:

http://forums.contractoruk.com/accou...2014-15-a.html

[PerfectStorm]

And is that going to be £10,600 from April or will it be a slightly different figure?

[ASB]

I thought you'd be paying NICs @ 12% on incoming over £7956 - therefore the most tax efficient salary was to remain below that threshold?

Yes, and no. It depends on whether you have other income which may potentially be subject to NI (unlikely but possibly).

To illustrate in very simple terms:-

Turnover 20k, expenses nil.

Salary 10,000; ni 245 = 9,755 net.

Profit = 20k - 282 (er's ni on salary) - 10k (salary) = 9718 = 7775 after tax.

Retained = 7775 + 9755 = 17,530.

=============================

Or, salary 7956 = 7956 retained.

Profit =20,000 - 7956 = 12044 = 9635 after tax.

9635 + 9635 = 17,591 (slightly better).

=============================

What you have to remember is that money not paid in salary is going to be taxed at 20% for CT. Thus if the payment attracts total taxes and NI of< 20% it is more efficient to pay up to that.

This is likely (but not certainly) 153/week. In the unlikely event your NI is other than "A" contributions this can make a difference.

Of course, as has been mentioned, there is the 2k NI rebate which you may be able to get. Even if < 2k NI have been paid.