Ltd Vs Umbrella take home monies

**cojak** · 9 May 2015, 18:33

It's possible because your friend is a greedy idiot who has signed up to a dodgy tax scheme 'umbrella' promising +80% take home pay.

**mudskipper** · 9 May 2015, 18:36

Originally posted by Blakes03 View Post

Hello All,
I am new to contracting but have read a lot into it and decided to go the Ltd route but am beginning to question myself as to ‘own business’ Vs Umbrella.

I started the same day as my contractor colleague and we are both on £400 a day. I am doing the ‘own business’ Ltd company route paying myself £672 a month PAYE and Dividends £2,383 a month for tax efficient reasons. I was on more than this take home as a Permie.

The reason I am questioning myself is that my colleague on the same day rate as me is taking home £6400+ a month. We have been at it for two months now and he is now just putting a deposit down on a Porsche 911 while I am scrabbling around on less money than I was earning as a Permie. How on earth is this possible?

Have you asked your accountant? This sounds like you're taking money up to the higher tax threshold, therefore leaving a lot of money in the company account. You can take more than this (making sure you leave enough to meet your tax liabilities) but there will be additional tax to pay. So for tax efficiency, your accountant is advising you to take money up to the higher threshold. If you need more than this, then you should take it - there's more to life than paying the least tax possible (and you'll need to pay additional tax at some point when you take the money anyway).

**cojak** · 9 May 2015, 18:38

Originally posted by mudskipper View Post

Have you asked your accountant? This sounds like you're taking money up to the higher tax threshold, therefore leaving a lot of money in the company account. You can take more than this (making sure you leave enough to meet your tax liabilities) but there will be additional tax to pay. So for tax efficiency, your accountant is advising you to take money up to the higher threshold. If you need more than this, then you should take it - there's more to life than paying the least tax possible (and you'll need to pay additional tax at some point when you take the money anyway).

This too, obv...

**PerfectStorm** · 9 May 2015, 20:17

It actually sounds to me like you're getting dicked - even if you were spreading out the full amount before the higher rate threshold over a year it should be more than that. Is the £400 exc VAT?

**mudskipper** · 9 May 2015, 20:21

Originally posted by PerfectStorm View Post

It actually sounds to me like you're getting dicked - even if you were spreading out the full amount before the higher rate threshold over a year it should be more than that. Is the £400 exc VAT?

No, it shouldn't - that's roughly right for monthly take home before higher rate. The £400 a day is irrelevant if the rest is sitting in the company.

**TheFaQQer** · 9 May 2015, 20:29

Originally posted by Blakes03 View Post

I started the same day as my contractor colleague and we are both on £400 a day. I am doing the ‘own business’ Ltd company route paying myself £672 a month PAYE and Dividends £2,383 a month for tax efficient reasons. I was on more than this take home as a Permie.

The reason I am questioning myself is that my colleague on the same day rate as me is taking home £6400+ a month. We have been at it for two months now and he is now just putting a deposit down on a Porsche 911 while I am scrabbling around on less money than I was earning as a Permie. How on earth is this possible?

There's two parts to this.

Firstly - yours. You invoice £9600 a month (£400 a day, 20 days a month, plus VAT). Take off corporation tax on that, and that gives £6400 a month. You are only paying out £3055 a month though, which means that after taxes there's an additional £3300ish in the company account. You could take that out and then pay tax on it now, or save it in the company for a rainy day. That's the problem with only thinking of the salary and dividend you are taking as being "tax efficient" - it is, but if you want to take more money so you earn more than as a permie, you need to pay tax on it.

Now let's look at your friend. He invoices the same £8000 a month, but somehow he takes home £6400 after taxes, meaning he gets to keep 80% of it. On an invoice of £8000, there is £875.90 of employers NI, £412.95 of employees NI, £1944.58 of PAYE to pay, making a total of £3233.43 in taxes. THERE IS NO LEGAL WAY TO BE AN EMPLOYEE WITHOUT PAYING THESE TAXES. So if he's paying the taxes that must be paid, then the most he can earn a month is £4766.57, and that means that he's paying nothing to the umbrella company each month.

I'd suggest that you look at how to run your company - the fact that you haven't noticed that you're racking up an extra £3000 a month in the company suggests to me that you aren't looking too closely at it, and are relying on someone (your accountant?) to run everything for you. This is not a very smart way to operate.

I'd also suggest that your friend makes sure he drives carefully - because when HMRC come a-calling, that Porsche is going to be theirs, not his. They have a tendency to not like tax avoidance these days, so imagine the fun they'll have with a tax evader.

**PerfectStorm** · 9 May 2015, 21:48

Originally posted by mudskipper View Post

No, it shouldn't - that's roughly right for monthly take home before higher rate. The £400 a day is irrelevant if the rest is sitting in the company.

42385 / 12 = £3532

**jamesbrown** · 9 May 2015, 22:15

Originally posted by Blakes03 View Post

Hello All,
I am new to contracting but have read a lot into it and decided to go the Ltd route but am beginning to question myself as to ‘own business’ Vs Umbrella.

I started the same day as my contractor colleague and we are both on £400 a day. I am doing the ‘own business’ Ltd company route paying myself £672 a month PAYE and Dividends £2,383 a month for tax efficient reasons. I was on more than this take home as a Permie.

The reason I am questioning myself is that my colleague on the same day rate as me is taking home £6400+ a month. We have been at it for two months now and he is now just putting a deposit down on a Porsche 911 while I am scrabbling around on less money than I was earning as a Permie. How on earth is this possible?

Call me a skeptic, but this sounds like the "tease"

Anyway, if this is a real post and your colleague is using an avoidance scheme, forget about it, that income is provisional (i.e. heading to HMRC before long). If you're concerned about money, take a larger dividend FFS; you can't be "tax efficient" and take a high income.

**Blakes03** · 9 May 2015, 22:41

Guys, thank you all for the good advice, really much appreciated and very good comments as always from this forum.

Yes, there is more to life than being tax efficient, I too could buy myself a flash car, but to be frank, that is not me.

I have noticed the money banking up in the company account, of course I have but my feeling is that I will let that build up for a rainy day in the future and when not working I will be able to carry on paying myself a tax efficient income from it. I am taking into account all the usual points covered in multiple threads here and what my accountant tells me when he can be bothered to reply to my emails!

To summaries and I know it is covered in multiple threads but my theory is the £672 a month is the PAYE (x12 = £8064) which means one is not going to be paying NI or tax on the salary, nor is one company going to be paying NI but it is enough for NI rights and Pension stuff to be maintained. Great, thumbs up.

The annual dividend payment is £28,606 which takes into account Nominal Tax Credit to bring it up to the full amount of £31,784. £28,606 dividend by 12 months is £2,383 therefore annually paying 10% tax on my Dividend take home total in January on the Self Assessment. This gives an annual total income from the company of £39,848 of which one only needs to pay 10% on £31,784 for the Self Assessment.
I can easily live on this as I also have a private income which for years I have obviously been paying 40% on. With a company income of £39,848, this gives one £2,537 at 20% and then anything over £42,385 at 40%.

That is my theory but I could be wrong. I certainly think Nominal Tax Credit is wrong but that is another thread I am sure.

My mate on the other hand who is swimming in cash, like every night a Saturday night is on the same day rate (£400 plus VAT) through an Umbrella!!! Yes I agree 100% with you My FAQQER, the maths don’t add up but I can assure you this is what his take home is. I have questioned it but he is not really sure how it all works and does not care and uses the Umbrella method because he can’t be bothered with all the home admin and sh1t that goes with a Ltd as he puts it!! As a result he gets a massive take home with no hassle and that is the way he likes it. One thing he has mentioned is that as we are in Central London, his travel is taken into account from Zone 6, plus his drive to the tube station and his parking - Really!!!

No Mr Brown, this is not a tease, I do not understand it, I am very curious and that is why I am posting this question. Wondering if this was normal.

Again, many thanks to you all for your comments

Ltd Vs Umbrella take home monies