Reply to: Take home pay estimates

[Dan@OrangeGenie]

Take home pay seems to be one of the most popular questions asked by a contractor.

In all my initial correspondence I try to outline a simple take home expectation, usually with a simple calculation. That way my contractors expectations are set at the right level from day one.

If you have a decent day rate, maximum dividend quota available and can take advantage of Entrepreneurs relief, then you will be looking at the higher end for take home levels over your company life.

Any good contractor accountant should be able to estimate this for you from day one.

[SpontaneousOrder]

75% off the +VAT turnover is a reasonable estimate...

That's what mine comes out at after a full year of work (with 5 or 6 weeks off). Day rate (without VAT) * 0.75. That's including mileage as 'take home' as I'm working localish and would have to pay that anyway as a permie. No pension.

[Alan @ BroomeAffinity]

75% off the +VAT turnover is a reasonable estimate...

It's a fairly easy process to get it exact if you want to smooth it over a year. I'll put our spreadsheet on the website soon for anyone who's interested but if you want it sooner on me your email.

[PurpleGorilla]

75% off the +VAT turnover is a reasonable estimate...

[Alan @ BroomeAffinity]

Got it.

[bigmaz]

yeah, I realise that its going to be the same answer with the figures I give them. I was more asking how much they charge for their accountancy fees, and then asked them to calculate the take home pay out of curiosity. The 1st 2 added on expenses that I didnt ask to be included. The 3rd was the more accurate figure.

Thanks for the PM reply, tried to reply but inbox is full again

[bigmaz]

I should also say that all accountants work with the same data. To get "quotes" from them in terms of take home and then picking the highest number is not how it works. Or it shouldn't be. However, salary levels, share splits etc have a huge bearing but these are for you to decide, acting on accountants' advice perhaps, but certainly not for the accountant to arbitrarily decide for you.

yeah, I realise that its going to be the same answer with the figures I give them. I was more asking how much they charge for their accountancy fees, and then asked them to calculate the take home pay out of curiosity. The 1st 2 added on expenses that I didnt ask to be included. The 3rd was the more accurate figure.

[Alan @ BroomeAffinity]

If you try again now. Ive deleted a few old messages.

[Alan @ BroomeAffinity]

I should also say that all accountants work with the same data. To get "quotes" from them in terms of take home and then picking the highest number is not how it works. Or it shouldn't be. However, salary levels, share splits etc have a huge bearing but these are for you to decide, acting on accountants' advice perhaps, but certainly not for the accountant to arbitrarily decide for you.

[bigmaz]

Take home pay is an employer mindset IMO, not a contractor mindset. However, we do get asked it a lot. Much will depend on your rate and expenses but, assuming you have done your homework in shareholding, and you've got the correct VFRS rate, 80% is not unrealistic up to approx £80k pa.

Income £80,000
VFRS gain £2,080
Salary £10,000
Fees £1,000
Profit £71,080
Corp tax £14,216

Divis (assuming 50/50 spousal split and no other income there should be no higher rate tax) £56,864
So, total "take home" £66,864 or 83.5%. (There will be a couple of hundred quid of NICs on the £10k salary but I don't have the tools to calculate that off hand.)

Thanks for your reply. I tried to PM you, but your inbox is full

[Alan @ BroomeAffinity]

Take home pay is an employer mindset IMO, not a contractor mindset. However, we do get asked it a lot. Much will depend on your rate and expenses but, assuming you have done your homework in shareholding, and you've got the correct VFRS rate, 80% is not unrealistic up to approx £80k pa.

Income £80,000
VFRS gain £2,080
Salary £10,000
Fees £1,000
Profit £71,080
Corp tax £14,216

Divis (assuming 50/50 spousal split and no other income there should be no higher rate tax) £56,864
So, total "take home" £66,864 or 83.5%. (There will be a couple of hundred quid of NICs on the £10k salary but I don't have the tools to calculate that off hand.)

[TheFaQQer]

The 74% is the realistic estimate. Anyone telling you can take home 80% plus is frankly spinning you a line. The only legitimate way that would be possible is if most of your income actually went straight into your pension, which is not something most people can do as they still need money to live on.

If the rate is quite low, and valid expenses are high, then you can get a higher percentage.

At one stage I managed a 100% take home for an extended period, simply by being out of contract for seven months and earning nothing.

[DaveB]

Thanks for your reply. Very helpful. I was getting my hopes up with the first 2 quotes

You can get a reasonable estimate yourself quite easily. For a basic one man band it looks something like this:

Gross Income = Day Rate + VAT at 20%

Monthly Deductions

VAT at applicable rate if you are on the FRS paid on Gross income, otherwise as charged at 20%

Salary - Usually up to NI threshold of £641 month or £833 month if you pay £10k year and take advantage of the NI relief. You can pay whatever salary you want but those two options are the most tax efficient.

Pension - Assuming you pay it from the company

Travel / accomodation

Mobile Phone

Email/Web hosting costs if your co. has its own domain.

Add any more regular *business* expenses you may have.

Once all that is deducted what you are left with is your gross profit on which you pay Corporation tax at 20%

Once the Corporation tax is deducted that is your net profit that can be distributed as dividends. Your net income will be whatever you pay in dividend + your salary. (Some people include the pension and expenses for the purposes of calculating overall take home, thats up to you.)

Calculate that as a percentage of the Gross income and then look again at what the accountants and umbrellas are telling you. The bigger the discrepancy the more questions you should be asking.

[bigmaz]

Thanks for your reply. Very helpful. I was getting my hopes up with the first 2 quotes

[pacontracting]

Hi guys

I have had a few quotes from accountants. 3 to be exact. 2 quotes that I got the other day (one of them Brookson) said my take home pay would be about 84% which I was chuffed about, then the one I got today said 74%. I looked closer at the break down, the 2 the other day had way more expenses than I said I would have. They said that the expenses they put down was a reasonable estimate. Am I missing something? What else are people claiming for? The only expense I can think of is my train ticket to my clients office. Can I claim my home line rental and broadband? Mobile phone?

Thanks in advance

I'm not sure if it's a mindset but I don't think of 'take home pay' as a function of daily rate.

Money comes into your Ltd Company. Pay yourself a salary. You may need to declare an interim dividend if you expect profit on a regular basis and you need the cash to live. Create a business plan - showing for each month, sales, company expenses (incl salary and corporation tax) so you can see what your long term income is. Doing this on a spreadsheet means you can simulate times you won't be working and see how that affects cash flow.

At the end of the year, take a look at your end of year profit and decide whether you can declare a dividend (taking into account any interim dividends you have taken) or keep the money in the company (do you need new equipment in the next FY etc).

So an accountant saying 'how much money you'll take home' just doesn't sit right with me.

You are going to get periods when you are not earning and this way, you smooth the cash flow out.