Working out an Annual Salary

[vwdan]

It just can't be done like this. Firstly, you need to take some (a lot) of time understanding the flow of money through your company including corporation tax, VAT, salary, dividends, national insurance etc etc - there are plenty of guides around for this but it will take time investment. If you're serious, you'll bury yourself in every guide you can find (SJD do some good ones) and really start to grasp what it means to have a business.

Once you've understood that, you then need to understand your market - are the jobs you're likely to get close to home or in another country. How much are they likely to pay?

Finally, you need to put together a list of company expenses that you'll incur - accountancy, e-mail, telephone, insurance etc.

Then, and only then, can you start to make some estimates as to what you will invoice per month, what you will spend, what your tax will be and how much you can take home.

I'm not trying to scare you off - it's perfectly possible to do the above because it's exactly what I did just over 12 months ago. Excel is your friend

Then, once you've got all that sorted - you need to make some harshly realistic presumptions about the work - can you survive on 8 months work a year?

[Forbes Young]

Hello,

I have seen a contract locally for £275 a day and am tempted to look into contracting as a way of life. I appreciate I need a good accountant and to such before taking the leap. But I wondered what an approximate, indicative gross annual salary would be for such a daily rate? This website tells me £66,000 per annum: Free Annual Salary Calculator | Pinnacle Accounting and Tax

Is this safe to rely on or is it missing subtleties. Again, just looking for some indications as I'd never take the leap without proper accounting advice. Thanks!

As a rough guide you should aim to work for say, 46 weeks and therefore have sales through your company of approx. £63k. This should save approx. £6-£7k per year compared to earning £63k per year in employment.

Again as a guide you should take home around 80% of the company's turnover - it is not possible to calculate accurate take home pay from a daily rate and expenses figure. You will find lots of income calculators on other accountancy firms’ websites (but not ours!). Some of these calculators are set-up to encourage potential clients to use their firm as they promise all sorts of unrealistic take home pay percentages which are unachievable. After all if you think about it everybody has different circumstances and income requirements, you can't have a one fits all formula.

The best advice is to appoint an experienced/qualified accountant to maximise your take home remuneration by taking their advice regarding IR35, taking a small salary, dividends and claiming maximum business expenses.

Graeme Bennett ACMA MBA

[Batcher]

If you are looking to make the change "as a way of life" then why worry about the comparison to a permie salary? Just concentrate on the daily rate and work out if you can survive for 8-9 months a year from that.

[TheFaQQer]

As a rough guide you should aim to work for say, 46 weeks and therefore have sales through your company of approx. £63k.

Depending on how you run your personal life, 46 weeks may still be high - last year I was in contract 100% of the year, and still only billed 222 days.

[Willapp]

In terms of eventual net take home, £275 is very roughly equivalent to a £34k permie salary.

HTH...

Really? I went from a £40k perm salary role into a £275pd contract and found I was significantly better off, and no I wasn't doing anything creative with my accounts - just expensing mileage at the £0.45p rate totalling £67.50 a week; minimum recommended salary (think it was around £625 a month) and the rest as dividends. Probably £500 per annum accountants fees plus another couple of hundred for insurance etc.

IIRC my "take home" on £40k was circa £2500 a month and I'd say I was easily doing £3-3.5k a month contracting. Didn't take much time off sick but I did fit in 2 fortnight holidays as well

I'd say £275pd is more like a £55k perm salary but it does all come down to what you bill and how you pay it out so it is very much a "how long is a piece of string" question.

[Forbes Young]

Depending on how you run your personal life, 46 weeks may still be high - last year I was in contract 100% of the year, and still only billed 222 days.

Yes I know what you mean - our contractors work for varying amounts of time during the year depending on their family life/how much they earn/availability of contracts to them etc so it is difficult to generalise. What is important though is that these guys thinking about contracting for the first time don't assume they are going to bill through their company for 52 weeks of the year :-)

Graeme Bennett ACMA MBA

[malvolio]

Really? I went from a £40k perm salary role into a £275pd contract and found I was significantly better off, and no I wasn't doing anything creative with my accounts - just expensing mileage at the £0.45p rate totalling £67.50 a week; minimum recommended salary (think it was around £625 a month) and the rest as dividends. Probably £500 per annum accountants fees plus another couple of hundred for insurance etc.

IIRC my "take home" on £40k was circa £2500 a month and I'd say I was easily doing £3-3.5k a month contracting. Didn't take much time off sick but I did fit in 2 fortnight holidays as well

I'd say £275pd is more like a £55k perm salary but it does all come down to what you bill and how you pay it out so it is very much a "how long is a piece of string" question.

Yeah, yeah, I know, heard it all before...

Two points here: newbies and calculators always assume you work 12 months a year, and newbies always assume expenses = income. Both are wrong. The idea of the rough approximation is to convert a salary to a day rate where both will give roughly the same net income for the average contractor working the average 7-8 months a year. There are always going to be exceptions, but they don't invalidate the estimate. It's also worked out originally starting from true cost of employement numbers, so it's not just a guess.

The point is to ensure new contractors actually understand the money pit has some limitations. If you get more than estimated that's bloody good, of course. But you may just get less...

[Willapp]

Yeah granted. It makes sense to assume working 9 months of the year to allow for holidays/sickness/bench time which would drop the "salary equivalent" quite a lot. Always better to under-state it than over.

I was lucky in working 15 months straight in my first contract (minus the aforementioned holidays) so I did end up significantly "better off" than my previous perm role.

[gigahoe]

Comparing rates to permie jobs is hard too because the various other benefits you probably got. Assuming that you're talking about a job with a decent company then you need to think about the health insurance, pension scheme, bike to work and all that other stuff they gave you. If you don't care about that then you can ignore but not all £60k permie jobs are equal.

[Taita]

Nothing is safe to rely on, there are so many factors involved. The day rate looks attractive but it's got to compensate for the days when you're not working, either because you're taking a holiday, off sick, or in between contracts. You have to pay accountants fees (well, you could do it all yourself but it's a bit of a minefield), your income will depend on how much you want to split between salary/dividends, whether you want to stay under the higher rate tax bracket or not, how much expenses you can claim for travel, etc etc

It's very much a "how long is a piece of string" question and you won't know your actual annual income until your end of year accounts have been prepared, and even then it's be different for every year.

As a rough guess? Anything between the online calculators as an over-the-top figure and, I don't know, maybe 20-30% of that?

Agreed but if the difference is as finely drawn as described above why would you bother?