Inside PAYE rate vs Outside via Limited

[tl97]

Hi all,

I've fed an Outside IR35 rate into ContractorCalculator's financial profile calculator. I've then taken the same rate as a PAYE rate, multiplied by 220 and entered it into a PAYE calculator. Both monthly figures returned are around the same.

It seems that if you're on an outside IR35 rate, and you take the entire amount earned out of your limited company in the same tax year, there's not really any difference to if you earned it on a PAYE basis. Clearly there is a difference if you take smaller amounts out of the limited company in the tax year, or if the inside rate wasn't PAYE (i.e. brolly). The general mantra is that outside is always better than inside - and it usually is, but not necessarily in this scenario. Any thoughts?

[northernladuk]

<sigh>

[malvolio]

No, no thoughts at all. At least, no polite ones...

[tl97]

To frame it another way, if you needed to take all the money out of your limited in the same year (eg. for a deposit, investment etc.) and your expenses are very low (no travel or large purchases), what’s the financial advantage of outside limited vs. inside PAYE?

[ladymuck]

How are you withdrawing the money from the LtdCo? All as salary or mix of salary and dividends? Did the calculator you use factor in CT and employer's NI for the LtdCo?

In your very specific and limited scenario, just take the PAYE job. The subtleties of running your own business are pointless.

[hobnob]

I've fed an Outside IR35 rate into ContractorCalculator's financial profile calculator. I've then taken the same rate as a PAYE rate, multiplied by 220 and entered it into a PAYE calculator. Both monthly figures returned are around the same.

I'll repeat what I said a couple of days ago in a different thread:

When you look at one of these calculators, you need to get a detailed breakdown to show how they've come up with their result.

Once you've got that level of detail, we can discuss whether the calculations are accurate, and whether they've made realistic assumptions.

Regarding the PAYE rate, take a look at this article:
Agency PAYE or Umbrella PAYE? - Clarity Umbrella Ltd
The key point is that an umbrella company will make deductions, e.g. employer's NI. So, it's not as simple as taking your daily rate x 220 and treating that as your gross salary for the year.

To frame it another way, if you needed to take all the money out of your limited in the same year (eg. for a deposit, investment etc.) and your expenses are very low (no travel or large purchases), what’s the financial advantage of outside limited vs. inside PAYE?

How are you taking the money out of your limited company? I.e. salary vs dividends? That will affect the amount of tax you pay (e.g. the first £2000 of dividends are tax free).

[tl97]

The outside limited calculations assume a basic salary and the rest as dividend withdrawals. CT is deducted. No employer/employee NIC deductions because the salary is under the threshold.

Umbrella rate is a non-starter, the employer NIC deductions alone wipe out a significant chunk. A PAYE rate is not through an umbrella, it has income tax and employee NIC deducted, not employer.

[eek]

The outside limited calculations assume a basic salary and the rest as dividend withdrawals. CT is deducted. No employer/employee NIC deductions because the salary is under the threshold.

Umbrella rate is a non-starter, the employer NIC deductions alone wipe out a significant chunk. A PAYE rate is not through an umbrella, it has income tax and employee NIC deducted, not employer.

So you are talking about a mythological, theoretical contract that can never exist because no-one is going to offer an outside IR35 that is anything other than an umbrella / assignment fee rate...

Any PAYE rate will be far lower than an outside IR35 rate because an outside IR35 is an assignment fee rate before employment costs are deducted.

[hobnob]

Umbrella rate is a non-starter, the employer NIC deductions alone wipe out a significant chunk. A PAYE rate is not through an umbrella, it has income tax and employee NIC deducted, not employer.

Who's going to pay the employer's NI in this scenario? I.e. if it's going to be more expensive for the client/agency to give you the PAYE rate, why would they do it? Just out of the kindness of their hearts?

[northernladuk]

Why don't you just use the Outside IR35 calculator on the same site which gives an direct comparison rather than multiply by some made up number and use a different calculator. It's apples and pears at best with out all that carry on. The numbers aren't the same.