Tax in 2015-16

[dugs]

Can someone please explain to me the financial benefit to contracting going forwards in the tax year 2015- 16. My numbers don't seem to make sense.


A permanent employee on £100K salary a year takes home around £70K after tax.


A contractor with a limited company with revenue of £100K a year appears to take home LESS than £70K after tax. How does that make sense? Here are my calculations:


Revenue = £100K

Salary = £10K

Profit = £100K - £10K = £90K

Corp Tax @ 20% = £18K

Profit - Corp Tax = £72K

First £5K of dividends is tax free.

Next £27K of dividends is taxed @ 7.5% = 7.5% of £27K = £2.025K

Remaining dividends of £40K is taxed @ 32.5% = 32.5% of £40K = £13K

So total take home = £10K (salary) + £5K (tax free div) + (£27K - £2.025K) (second div) + (£40K - £13K) (third div) = £66.975K

which is LESS than the £70K as a permanent employee!

Thanks

[Waldorf]

Tax in 2015-16

Did you mean 2016-17? The new dividend tax only comes in from April 2016.

Payroll calculators give a lower net pay than you've stated.

As a contractor you have neglected to the advantage of Flat Rate VAT, travel expenses, mobile phone etc.

[ctdctd]

According to MSE, for the current 2105-16 tax year:-

Earn £100,000 in 2015/2016 and you'll take home £65,326. This means £5,444 in your pocket a month.

Over the year you'll pay £29,403 income tax and £5,271 in National Insurance.

Where does your £70K come from?

[northernladuk]

Did we not do this in great detail very recently and never really got to the conclusion the original poster wanted as it's not all about the money?

Edit.. Can't find the original thread but plenty of reading for you here.

https://www.google.co.uk/search?q=sa...obile&ie=UTF-8

[northernladuk]

As a contractor you have neglected to the advantage of Flat Rate VAT, travel expenses, mobile phone etc.

And conversely he's forgotten its far from the norm to do a full 12 months billing and he doesn't get paid for holidays and sick etc etc.

[jamesbrown]

Your numbers are completely wrong. A permie would take home a little more than 65k, but you've also failed to account for the Employer's NI, which is a pretty elementary mistake. The total cost to an employer of a 100k employee is way more than 100k.

[PerfectStorm]

The biggest difference, bigger than the difference in national insurance itself and which people ALWAYS miss, is this:

It's a lot easier to get a job paying 100k before tax to a limited company that can be terminated immediately, than it is to get the same as a normal PAYE job, with holidays, sick pay, redundancies and benefits to pay for, because it costs about 2x Salary to employee someone in the UK and be able to account for all of these things.

If you're willing to take the risk on the latter (and pay for your own holidays as and when needed) the extra money, rather than being spent on someone's maternity leave or paying off some rubbish worker's 'redundancy', goes to you.

That is why - unless you're on a crap day rate - contracting is better.

[northernladuk]

Is not a real comparison though. Most contractors turning over 100k cannot command 100k as a permie so it's a bit of a flawed comparison.

[Snarf]

Is not a real comparison though. Most contractors turning over 100k cannot command 100k as a permie so it's a bit of a flawed comparison.

Exactly.

.net Dev with 11/12 years experience. Permie I'd get £45k ish. As a contractor I'm getting > double that with the same effort.

[Andy O]

Exactly.

.net Dev with 11/12 years experience. Permie I'd get £45k ish. As a contractor I'm getting > double that with the same effort.

I agree. As an IT Architect I could earn around £50k to £60k gross as a permie but as a contract I am billing £110k per year.