Changing from employment into contracting work

[Passero]

Currently I work for one of the biggest IT companies in the world and I am looking to start on my own as a contractor.

Currently they pay me around 70k but that's below market value (one of the reasons why I want to move away from them). I get offers to start elsewhere between 90 and 100k.

In order to make a proper decision between contracting and employment I also want to make a somewhat comprehensive comparison between the pay rate.
I know that when I get into contracting work, I will probably get around 450 a day. Recently I got an offer for a 6 month contract for 475/day.

When moving to contracting work, I will have to look after my own medical plan (which I now get from the company) and some other benefits like pension plan, holidays and so on.

First of all I want to understand how much taxes I need to pay.

To keep it simple I calculate my income: 450*5*44 (44 weeks because I want to calculate in some holidays or illness) = 99k
According to the corporation tax calculator I would have to pay 19.8k tax which results in 79.2k profit.
I probably also have to pay some NI but I can't seem to find out how much...

I basically want to understand how to calculate everything that goes to the government and NI and things like that.

In addition I also would like to understand what a good safety net would be that can account for those difficult times that you can't find a contract. How much do you set aside and/or how much do you pay yourself as a salary?
Can I simply pay myself a salary or would I have to pay additional taxes on that?

I just want to understand how to compare self employment income vs a normal employee.

[jamesbrown]

You're being optimistic in thinking you'll work an average of 220 days per year as a contracting n00b. There's a good chance you'll work significantly less. If you're being offered 90-100k plus benefits for a permie job, you're not even close to matching that on 450pd IMHO (I could offer a back of the envelope calculation, but there's a limit to what you can learn from those). On a purely financial basis, a permie position paying a guaranteed 90-100k is going to be very tough to beat unless you're a specialist with significant contracting experience (in which case you'd be looking for more than 450pd). Remember that most clients willing to pay higher rates are looking for seasoned contractors that have proven their ability to deliver within a contracting environment.

In terms of your CT "calculator", you'll need to do some more reading about what constitutes profit (hint: it isn't the same as turnover).

[jamesbrown]

ps. if you want to play around with figures, this is a good start (but don't lose sight of the bigger picture):

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

[Passero]

ps. if you want to play around with figures, this is a good start (but don't lose sight of the bigger picture):

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

Thanks for this.
I might not be a seasoned contractor but I am a recognized expert in my field and well known around the world in my field.

I don't want to overestimate so that's why I went with 450 because that was also based upon first offers I got. I will probably get more if I negotiate.

Based upon a salary of 100k, the net pay is around 5.4k net/monh. According to the above calculator that's the same as 40 weeks worth of 450/day.
If I compare it to a 90k job (5k/month net) that's about 35 weeks worth of 450/day.

Is this a correct comparison or am I missing something.

[malvolio]

ps. if you want to play around with figures, this is a good start (but don't lose sight of the bigger picture):

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

Perhaps a little reading about the difference between corporate and personal taxation wouldn't go amiss either...

Seriously, you are missing some hugely important points here; your questions are about absolute basics.

And don't go into contracting for the money...

[jamesbrown]

And don't go into contracting for the money...

Amen. I earn a lot less now than I earned as a permie. Of course, that's a choice about how to distribute profits, but if you're in it for the long run, you need a substantial warchest and, personally, I don't see the point in paying myself a large income just because I can (and there's a fair bit of circularity to what you take and what you need).

[jjdarg]

I did the maths for when I was on ~£500/day and compared like-for-like were it to be a perm role, and I would have to gross just north of £90k on a perm role to match up what I was taking home and the financial benefits of being ltd vs permie were for me - each of us will have a different profile for what our like-for-like would be.

So if you are thinking of switching only for the money, and you're being offered £90-100k for perm, stick to the perm.

If, on the other hand, you think you enjoy the autonomy of contracting and think you could hack it through good times and bad, then go for it, after educating yourself on what it means to go it alone.

[ujjain]

Assuming you'll work 44 weeks is a bit high.
Don't do it just for the money, contracting has so many non-financial benefits, make sure you would be fine if you would be without a job for a few months.
£450 daily is not very high for somebody who would be worth £80k+ perm.
Your accountant should be able to explain your take home, you basically pay yourself £10k yearly to avoid paying NI and use your personal allowance, then pay yourself the rest as dividend. Read a little, it's indeed a bit confusing how you pay taxes twice and still end up paying much less taxes than permies, although the 20% profit on 100k you mentioned, seems optimistic.

[SueEllen]

Thanks for this.
I might not be a seasoned contractor but I am a recognized expert in my field and well known around the world in my field.

If you are well-known and willing to travel then start networking NOW and telling people you are available.

You can easily earn more than £450 a day however you need to figure out your market rate.

You also, like the others have mentioned, be aware that you won't be working all the time. So do the reading.

[stek]

Thanks for this.
I might not be a seasoned contractor but I am a recognized expert in my field and well known around the world in my field.

I don't want to overestimate so that's why I went with 450 because that was also based upon first offers I got. I will probably get more if I negotiate.

Based upon a salary of 100k, the net pay is around 5.4k net/monh. According to the above calculator that's the same as 40 weeks worth of 450/day.
If I compare it to a 90k job (5k/month net) that's about 35 weeks worth of 450/day.

Is this a correct comparison or am I missing something.

You're missing something, recognised my whom?

3 years ago I was approached about perm roles (albeit in the City) for LDAP roles and whilst I'd worked on big LDAP farms i'd no 'rep' - just an ordinary. Sals. offered £115k...

You need to appreciate then unless your skill is generic (which it doesn't seem to be) - you won't work even 8/9 months of the year.

And to be honest, 'known' or not, in this game it matters not one jot, it's just what rate you can squeeze and whether the agent can do the same and whether he can pull the wool over your eyes and keep it, or whether you have the nous to second guess that.