Contractor pay?

[325i]

I have been offered my first contract job. I have done plenty of reading on the internet and will speak to an accountantbut have a few questions.

- Im currently in permanent position and therefore already earned more than my tax allowance of £9440 this tax year. Therefore I presume i will be 20% taxed and liable to pay NIC regardless on how much my salary is through my ltd company?

- Regarding expenses, am i correct in saying the more expenses I can claim back the better regarding to paying corporation tax?

As an example, I buy a laptop for £400 from my personal account, i then claim this money back from my ltd company. So in affect, im getting a free laptop and also reducing my corp tax. Is this how it works?

[northernladuk]

As an example, I buy a laptop for £400 from my personal account, i then claim this money back from my ltd company. So in affect, im getting a free laptop and also reducing my corp tax. Is this how it works?

No, you effectively get 20% off. Rest all comes out of your pocket in the long run.

Read the newbie guides to the right -> The clue is in the title 'Contractor Expenses'

A quick search on your tax issue finds...

http://forums.contractoruk.com/accou...-contract.html

There are many things to consider in your position and all of them will have been documented in a guide or can be found in a search.

Also have a look at this...

http://forums.contractoruk.com/accou...-business.html

[stek]

I have been offered my first contract job. I have done plenty of reading on the internet and will speak to an accountantbut have a few questions.

- Im currently in permanent position and therefore already earned more than my tax allowance of £9440 this tax year. Therefore I presume i will be 20% taxed and liable to pay NIC regardless on how much my salary is through my ltd company?

- Regarding expenses, am i correct in saying the more expenses I can claim back the better regarding to paying corporation tax?

As an example, I buy a laptop for £400 from my personal account, i then claim this money back from my ltd company. So in affect, im getting a free laptop and also reducing my corp tax. Is this how it works?

1. Just take dividends this tax year - if you don't get what that entails speak to your accountant. As an employer and an employee you will pay both EE and ER NICs, roughly 25% if you go the Salary route plus most likely 40% tax. So 65%. Contracting for the money?

2. Yes, but you're only saving the CT, not the full expense cost. Also the expenses are coming out of your/the Co's pocket, so fundamentally the more you spunk out, the lower your war chest for when you're benched - and you will be.

3. No, you're only saving the CT, not the full expense cost. £80 in this case.

Accountant first.

[325i]

1. Just take dividends this tax year - if you don't get what that entails speak to your accountant. As an employer and an employee you will pay both EE and ER NICs, roughly 25% if you go the Salary route plus most likely 40% tax. So 65%. Contracting for the money?

2. Yes, but you're only saving the CT, not the full expense cost. Also the expenses are coming out of your/the Co's pocket, so fundamentally the more you spunk out, the lower your war chest for when you're benched - and you will be.

3. No, you're only saving the CT, not the full expense cost. £80 in this case.

Accountant first.

Thanks, great reply. A couple of comments if you dont mind;

1. Yes this was the method I was thinking as I would save 20% on PAYE tax and 25% on both employee and employer NIC. Am i correct in saying the only deductions will be 20% on corp tax? (I presume 20% is correct and my earnings this tax year is less than the higher tax rate threshold)

2. OK understood. The reason I was confused was i used an online take home pay calculator and it says the take home pay is salary + dividends + expenses claimed. But in reality is it salary + dividends + 20% expenses total?

Thanks

[Brett at Nixon Williams]

I have been offered my first contract job. I have done plenty of reading on the internet and will speak to an accountantbut have a few questions.

- Im currently in permanent position and therefore already earned more than my tax allowance of £9440 this tax year. Therefore I presume i will be 20% taxed and liable to pay NIC regardless on how much my salary is through my ltd company?

- Regarding expenses, am i correct in saying the more expenses I can claim back the better regarding to paying corporation tax?

As an example, I buy a laptop for £400 from my personal account, i then claim this money back from my ltd company. So in affect, im getting a free laptop and also reducing my corp tax. Is this how it works?

Although paying a salary will attract Corporation Tax relief for the company (20%) as you have earned more than the personal allowance for 2013/14 already you will pay tax on the salary personally – 20% at basic rate, hence no gain. However, the salary will take up more of your basic rate tax band and hence reduce the dividends you can take effectively free of tax. You will pay tax on dividends taken above the basic rate band (£32,010 for 2013/14), so basically once your total gross income exceed £41,450 i.e. £9,440 personal allowance + £32,010 basic rate band. It would make sense therefore to only take dividends.

In terms of NIC your company will not pay Employers NI until your gross salary exceeds £7,696 per annum and you personally will not pay Employees NI until the earnings exceed £7,755 per annum. Note these limits are pro rated if you become a director part way through the tax year, director’s pay on a cumulative basis.

Expenses – You will only save Corporation Tax at 20% on these. Unless the expense is already incurred it would not make sense to spend purely to save the Corporation Tax, as ultimately you would still be out of pocket. The expenses should be wholly and exclusively for the business.

In the example with the laptop (asset treatment aside) the company would reimburse you the full £400 if paid personally. This is an expense to the company, therefore reducing profits and hence saving Corporation Tax at 20% = £80. The cost to the company is effectively £320. Remember that the company funds are effectively yours so you still ultimately suffer the cost.

I hope this helps.

Brett

[northernladuk]

Thanks, great reply. A couple of comments if you dont mind;

1. Yes this was the method I was thinking as I would save 20% on PAYE tax and 25% on both employee and employer NIC. Am i correct in saying the only deductions will be 20% on corp tax? (I presume 20% is correct and my earnings this tax year is less than the higher tax rate threshold)

The answer is in the threads I linked. Most people that enter contracting come up against this. Read them, there is some good stuff in there that will answer any other questions you haven't asked yet.

2. OK understood. The reason I was confused was i used an online take home pay calculator and it says the take home pay is salary + dividends + expenses claimed. But in reality is it salary + dividends + 20% expenses total?

Thanks

Not quite.. You have taken the answer to one question and stuck it on the back of another.

Your take home is as it says salary + dividends + expenses but you had to spend the money to get an expense, which comes out of the profit of the company which you eventually withdraw as some point further down the line.

Start with the basics again and it will all become clear. You have to understand the workings of your company as well. Newbie guides will take you through it all as will your accountant.

There is much more to running a business than your take home and until you understand how the business works your take home is going to be very confusing.

[stek]

Thanks, great reply. A couple of comments if you dont mind;

1. Yes this was the method I was thinking as I would save 20% on PAYE tax and 25% on both employee and employer NIC. Am i correct in saying the only deductions will be 20% on corp tax? (I presume 20% is correct and my earnings this tax year is less than the higher tax rate threshold)

2. OK understood. The reason I was confused was i used an online take home pay calculator and it says the take home pay is salary + dividends + expenses claimed. But in reality is it salary + dividends + 20% expenses total?

Thanks

Don't forget dividends aren't tax deductible (apart from 10% tax credit) - so ur CT is income - salary - expenses = taxable profit. And only up to the 40% limit - after that it starts to cost - speak to an accountant.

Stop thinking about take home pay, the lower that is the better as you save tax for you and your Ltd and there's more in the pot for rainy days. The prudent contractor draws as little as possible and claims as little as possible because at the end of the day it come out of your pocket. Your limited is you, and there's two pots to look after!

[325i]

Thanks everyone for the replies. Forgive me but still slightly confused about take home pay. Im going to do a really simple example, could you confirm to whether the theory is correct?

Weekly gross income = £1000
Directors Salary = £100
Expenses = £150
Profit = £750 (1000-100-150)
CP tax = £150 (20% of £750)
Dividens = £600
Take home pay = £100 (salary) + £600 (dividend) + £30 (20% CP tax saving) = £730

[stek]

Thanks everyone for the replies. Forgive me but still slightly confused about take home pay. Im going to do a really simple example, could you confirm to whether the theory is correct?

Weekly gross income = £1000
Directors Salary = £100
Expenses = £150
Profit = £750 (1000-100-150)
CP tax = £150 (20% of £750)
Dividens = £600
Take home pay = £100 (salary) + £600 (dividend) + £30 (20% CP tax saving) = £730

The £30 isn't yours - it's the company's..

[Brett at Nixon Williams]

Thanks everyone for the replies. Forgive me but still slightly confused about take home pay. Im going to do a really simple example, could you confirm to whether the theory is correct?

Weekly gross income = £1000
Directors Salary = £100
Expenses = £150
Profit = £750 (1000-100-150)
CP tax = £150 (20% of £750)
Dividens = £600
Take home pay = £100 (salary) + £600 (dividend) + £30 (20% CP tax saving) = £730

The example works down the the profit for dividends line.

Your take home pay would be £850 (£100 salary, £150 expenses, £600 dividend). This assumes the expenses were paid personally and then reimbursed of course.

Corporation Tax is paid on the company profits alone and it is the post tax profits available for dividends.

From the take home pay you would have to consider any further personal tax on the dividend if this is in excess of the basic rate band.

I hope this helps.

Brett