Reply to: Are my assumptions correct

[Bluebird]

Well -the ir35calc works out your year based on working 44 weeks which, ok, might be optimistic but even when you take all the above into consideration I'd still rather take home £5,615 a month on a £450 a day contract outside ir35 than £3423 a month on a 60k perm job.

Then again, 60k is not exactly a bad salary is it..

What am I missing?

yes - thats why a lot of us do contracting rather than permie work !!!


However there are additional benifits to being permie which need to be added into the equation....
How much does a company put into your pension fund ?
How many hours do you work as a contractor which you don't get paid for - ie contract search, interviews, accounts ect.
What additional expenses do you incur as a business ? Fees, Insurance etc.

All of these things either add to the figure of £3423 or detract from the £5615.

But at the end of the day contracting can be rewarding from a financial point of view, I personally do it for the lifestyle - I don't think anybody should do it purely for the money.

[monkeyBoy32]

What about:
Holiday pay
Sick pay
Time off between contracts
Pension
Other benefits
Etc etc

£450 a day 5 days a week 52 weeks a year would maybe equate to £100k with no benefits
£450 a day 5 days a week, 40 weeks a year, probably more like £60k + benefits

I usually go on hourly rate * 1000 (so approx 56k for £450/8)

Well -the ir35calc (http://calculator.contractoruk.com/) works out your year based on working 44 weeks which, ok, might be optimistic but even when you take all the above into consideration I'd still rather take home £5,615 a month on a £450 a day contract outside ir35 than £3423 a month on a 60k perm job.

Then again, 60k is not exactly a bad salary is it..

What am I missing?

[Bluebird]

How can that be? If you run 450 a day through the ir35 calc, you get a monthly net of about 5,600 which would require a salary of about 104,000..

?

It's not about eqality in money terms - keep up !!

If you are a PM on about £450 per day - the same job would not be advertised for a permie role as £100,000 pa.

A permie job for a PM would more than likely attrach a salary of about £45k.

[Archangel]

How can that be? If you run 450 a day through the ir35 calc, you get a monthly net of about 5,600 which would require a salary of about 104,000..

?

What about:
Holiday pay
Sick pay
Time off between contracts
Pension
Other benefits
Etc etc

£450 a day 5 days a week 52 weeks a year would maybe equate to £100k with no benefits
£450 a day 5 days a week, 40 weeks a year, probably more like £60k + benefits

I usually go on hourly rate * 1000 (so approx 56k for £450/8)

[mailric]

wow. sometimes i realise i'm not as clever as i thought.

[max]

Having said that it is a risk. If I were you I would try and get your first contract in the bag before you hand in your notice for your permie job.

It appears the city contractor market has been sideswiped by the on going credit "crisis"

Check out jobstats.co.uk

Detetica who also provide IT services to the banks warned today on their outlook.

25% share price hit.

[monkeyBoy32]

Your 450 a day therefore equates to £45k salary.

How can that be? If you run 450 a day through the ir35 calc, you get a monthly net of about 5,600 which would require a salary of about 104,000..

?

[Billy Pilgrim]

don't forget you can make some of the VAT FRS.

By the way, your calculations are comparing apples & pears.

A contractor who gets paid £450 would not expect to attract the same in salary.

I beliece that rule of thumb is to x daily rate by 100 to get eqivilent salary in permie land.

Your 450 a day therefore equates to £45k salary.

Another way of looking at it would be:

What permie salary would be required to get me a take home of knocking on for 40K - i.e. higher tax threshold - if paying min possible salary 5K and rest in divis...

I reckon that it is around 55K --- and I also reckon you will have cash left over in the company accounts at year end (or a nice little wad in your pension fund !!)

[Bear]

You've deducted your salary twice

[Bluebird]

don't forget you can make some of the VAT FRS.

By the way, your calculations are comparing apples & pears.

A contractor who gets paid £450 would not expect to attract the same in salary.

I beliece that rule of thumb is to x daily rate by 100 to get eqivilent salary in permie land.

Your 450 a day therefore equates to £45k salary.

[minstrel]

Other things you can do to squeeze a bit more out and raise the percentage are:

1. Pay yourself personal allowance in salary (£5,225 rather than £12,000). This is below National Minimum Wage and some people advise against it. You'll see plenty of debate on this forum about the pros and cons if you do a search.

2. Understand that some of the expenses you put through the company are actually benefits you wouldn't have got through your permie job and account for them accordingly.

Good luck with your decision about making the leap into contracting. We've all done it and it is a big decision. However, I've got lots of ex-consultancy contrator friends and without exception their only regret is that they didn't do it sooner.

Having said that it is a risk. If I were you I would try and get your first contract in the bag before you hand in your notice for your permie job.

Timings can be tricky as contracts normally want you asap and you probably have a notice period for your permie job. It's all negotiable though, and even if worst case scenario you have to "go sick" and walk out of your permie job, there's not a lot your permie employer can do to stop you. Might be burning a few bridges though so probably a last resort option.

Good luck!

[DiscoStu]

Assumptions just make an ass of u and mptions.

Hang on, that's not right....

[Xyphod]

Hi Guys
thanks for the tip.
The question is, how the hell do some of the online Accountancy companies arrive at their figures? I.e. only 25% of total going to Mr Tax man???

[IR35 Avoider]

Hello a newbie here, currently considering setting up my own ltd after beeing permie (but a consultant) for far too long.
Trying to get a good understanding of tax implecations, etc but the results seem a little disappointing.

Here go's please correct me if I'm wrong

Assume I raise £100000 in invoices to my company over the year (Rate of roughly £450 a day over 220 days)
I have about £5000 in annual expensis, i.e. travel, fees, etc, etc
I pay myself an Anual salary of £12000
And NI contributions of 1536 (at 12,8%)
This would leave the company with a profit of £81464 Pounds
at 20% Corp tax that would leave £65171.2 to be payed to myself as Dividends.

So now looking at Money in my Pocket after tax.

£12000 Salery
- Tax and NI = £10029
Now the Dividends
From £12000 to £34000 the dividends are effectivly tax free (i.e. 10% - 10% tax credit) ~~ still a little confused on this one. Giving me £22000
Now above the £34000 theshold at 22.5% for dividends (65171.2-34000)*77.5% = £24157.68
So the total in my pocket is £10029+£22000+24157.68 =£56186.68.
Now this does seem rather low to me, i.e. a Rate of return to me of 56% or 44% to the Tax Man.
Now on a £100000 Salery I would expect to get £64,673.60 in my pocket, i.e. a rate of return of roughly 65% or 35% to the Tax man.

Obviously an accountant could put me right, but I like to get a good understanding of these things before I leap into anything.

Thanks in advance for your help

I plugged your numbers into my spreadsheet and they seem about right. If you're going to be saving some of the money you can avoid higher rate tax by leaving it in the company (investing it there) and paying it out in as dividends in a later year when you're a basic-rate payer. Alternatively, company contributions to a pension would get huge amounts of tax relief, keeps your companies bank account empty (a good thing) and would count as salary for IR35 purposes, so that if your status was ever retrospectively altered you would have a much smaller bill.

If you paid salary of £5225, dividends up to £34000, and the rest in pension contributions then (assuming pension is eventually taxed at 15%, i.e. a quarter tax-free and the rest at 20%) I calculate tax man will get about 15% of the 100K. Of course if you are 23 with a huge mortgage rather than 43 with a paid-for house, this plan will be less appealing to you than it is to me.

[ASB]

The flaw in your thoughts is that the 100k billing is a 100k salary. It's 100k including Er's NI. This is in effect a salary of 89k (at a gross cost to the company of 100k incluiding the 11k ers ni that would be due). This would yield
about 58k net.

You are about right in the calc of the dvidend route. But note that the Er's NI is only levied on the excess after the LEL (so er's NI is broadly payable on 7k on a 12k salary. Approx 1k not 1.5k).

Summary. Pay CT and the rest as divis = 65k in the pocket. Pay 89k salary = 58k in pocket.

Either way the company has the same amount of money left over. None.

Congratulation are in order for thinking about it and getting it close to right. Not sarky, honest