Reply to: UK Tax & Salary calculations

[BtfBA]

You want to try that in English?

You buy something for £12 for work; that's £10 for the item and £2 VAT. You claim £12, which is what you spent out of your income. You are given £12 so no problems. If it's your own company and you are VAT registered you can get the £2 back, so YourCo has spent out £12 at a cost of £10. Yep, £2 saved. Only snag is we're talking about umbrella users...

Don't mix up your income and your company's income, they are totally separate things. You don't get the VAT back, YourCo does (if you have one). You personally get the total cost of whatever you bought back.

Fair enough, thanks.

[malvolio]

Gentlemen, in my current situation I declare some expenses, and (according to the items motivating the expenses) I get the VAT refunded. At least it should work accordingly with the Ltd scheme in the UK.

You want to try that in English?

You buy something for £12 for work; that's £10 for the item and £2 VAT. You claim £12, which is what you spent out of your income. You are given £12 so no problems. If it's your own company and you are VAT registered you can get the £2 back, so YourCo has spent out £12 at a cost of £10. Yep, £2 saved. Only snag is we're talking about umbrella users...

Don't mix up your income and your company's income, they are totally separate things. You don't get the VAT back, YourCo does (if you have one). You personally get the total cost of whatever you bought back.

[BtfBA]

I agree with Malvolio here. Although expenses are claimed back, in my opinion it is not part of your take home percentage because you'll will have expensed these costs and simply reimbursed so the net effect is NIL.

Expenses does however have an effect on your actually net pay from an umbrella. Discounting the expenses as part of your take home percentage of your day rate, you would be looking at about 58%. If you include the expenses as part of your take home percentage, it can obviously go up to 65 - 70%.

Gentlemen, in my current situation I declare some expenses, and (according to the items motivating the expenses) I get the VAT refunded. At least it should work accordingly with the Ltd scheme in the UK.

[BtfBA]

I was surprised when I fell foul of it too.

Imagine you're a regular permie. You get a job with HAL Software Limited as a developer.

Your boss says "We don't provide kit, that's your problem". You then have to buy what you need at your own expense. You can, however, put it on your personal tax return and so claw some back.

If you put it down as expenses through your brolly, where is the money to come from? The way it works with the brolly I'm with, is that if you put such an item on expenses, they refund you the tax and it becomes their property. Then at some arbitrary time in the future you can buy it from them for "an admin fee". A shambles, really.

I rather wish I had known that before putting a few hundred quid's worth of kit through the expenses.

When I worked through my own LtdCo I bought hardware, software and training willy-nilly; that's stopped now I'm in a brolly since it all comes out of your own pocket at full price.

Thanks for the warning, I appreciate. It is really a disgrace to be withdrawn your ownership on some items you have yourself bought. Eventhough I imagine that the mentioned admin fee is low, I find it is existing is already something absurd, really.
I dunno if all umbrella do such, but that would clearly be annoying to fall into that situation.
Besides, I am sure it could create a relevant case law to abort such a practice.

[Craig@Clarity]

Actually that's a bit of a myth, isn't it? To claim expenses you should first have spent your own taxed income to pay for whatever it is you're claiming. So the net effect is zero

I agree with Malvolio here. Although expenses are claimed back, in my opinion it is not part of your take home percentage because you'll will have expensed these costs and simply reimbursed so the net effect is NIL.

Expenses does however have an effect on your actually net pay from an umbrella. Discounting the expenses as part of your take home percentage of your day rate, you would be looking at about 58%. If you include the expenses as part of your take home percentage, it can obviously go up to 65 - 70%.

[RichardCranium]

As per your last post, I was quite surprised by the laptop example. I had precisely in mind to renew my IT equipment on the spot as I will not be able to travel with a PC, printer, and other thingies.

I was surprised when I fell foul of it too.

Imagine you're a regular permie. You get a job with HAL Software Limited as a developer.

Your boss says "We don't provide kit, that's your problem". You then have to buy what you need at your own expense. You can, however, put it on your personal tax return and so claw some back.

If you put it down as expenses through your brolly, where is the money to come from? The way it works with the brolly I'm with, is that if you put such an item on expenses, they refund you the tax and it becomes their property. Then at some arbitrary time in the future you can buy it from them for "an admin fee". A shambles, really.

I rather wish I had known that before putting a few hundred quid's worth of kit through the expenses.

When I worked through my own LtdCo I bought hardware, software and training willy-nilly; that's stopped now I'm in a brolly since it all comes out of your own pocket at full price.

[BtfBA]

That's illogical, Captain.

When you are working through a brolly, you are there employee and are taxed accordingly. There is no IR35 to worry about because you are already being taxed on everything as salary.

That is why brollies - rather cheekily - boast they are "IR35 compliant": because you are paying tax as if working through a LtdCo and caught by IR35 (actually, you pay a little more tax when using a brolly).

Gentleman, thanks for the information. I had thought that IR35 was driven foremost by the employment status.
I am realising I need to dig this serious subject before jumping with both feet into the contract.

As per your last post, I was quite surprised by the laptop example. I had precisely in mind to renew my IT equipment on the spot as I will not be able to travel with a PC, printer, and other thingies.

[RichardCranium]

Also, when using a LtdCo, you can claim some extra expenses. The brollies won't tell you this up front.

When using a brolly, you can only claim costs incurred once the contract starts. And since the contract starts when you are stood in Reception at 09:00 on Monday, a LtdCo contractor can claim for, but a brolly employee CANNOT claim for:
- the cost of attending the interview;
- the cost of travelling to ClientCo's town on Sunday night;
- the cost of the hotel on Sunday night;
- the cost of travelling to ClientCo on Monday morning.

The LtdCo contractor can claim all expenses for attending interviews where they do not get the gig. Brolly employees cannot claim any expenses for attending interviews, courses, professional meetings, etc.

Also, when you get to ClientCo and discover you need to buy a laptop and development software, sharpish, to be able to do the gig, then:

a) as a LtdCo contractor your LtdCo pays for it which is where you get tax & VAT benefits;
OR
b) as a brolly employee you have to choose between paying for it out of your own pocket after tax (just like any other mortal);
OR
c) as a brolly employee you claim expenses for it from ... the brolly. Making the laptop & software the property of the brolly.

So buying 'assets' goes horribly wrong when you are with a brolly, relative to a LtdCo contractor.

[RichardCranium]

Correct me if I am wrong but if I fall outside the IR35 status under an umbrella account, I expect to fall as well outside the IR35 with a ltd.

That's illogical, Captain.

When you are working through a brolly, you are there employee and are taxed accordingly. There is no IR35 to worry about because you are already being taxed on everything as salary.

That is why brollies - rather cheekily - boast they are "IR35 compliant": because you are paying tax as if working through a LtdCo and caught by IR35 (actually, you pay a little more tax when using a brolly).

[BtfBA]

Since it's to do with working condition between end client and you, why should your payment vehicle have any bearing at all? 'Cos it doesn't.

If you do go limited, then you can rearrange your affairs to save a bit on tax and NICs, but it comes with legal responsibilities and rather more paperwork and record keeping than the average brolly so make sure you are happy to be your own boss.

Thanks for the tips. I will go for a quick simulation and see what would be the result under a ltd. A 5% gap with the umbrella is worth risking headaches with paperwork and legal stuffs.

[BtfBA]

OK fellow contractors, I have input a different value in the allowable expense (a more realistic £20,000.00 amount) and it gets a 69% take home pay.

[malvolio]

I have not been informed of such a gap between umbrella and ltd entities, otherwise I would be considering to establish a limited company.
Correct me if I am wrong but if I fall outside the IR35 status under an umbrella account, I expect to fall as well outside the IR35 with a ltd.

Since it's to do with working condition between end client and you, why should your payment vehicle have any bearing at all? 'Cos it doesn't.

If you do go limited, then you can rearrange your affairs to save a bit on tax and NICs, but it comes with legal responsibilities and rather more paperwork and record keeping than the average brolly so make sure you are happy to be your own boss.

[BtfBA]

I would say between 60 and 70 something with a Ltd outside IR35.

With the government clamping down on dodgy tax practices, I would be conservative.

If you have bonafide expenses then claim them, but don't accept any "virtual" expenses, make sure what expenses there are, are real, and keep all the receipts just in case.

Be wary of anything beyond about 75% take home.

I do agree with your range of take home pay. Although the CUK calculator is introducing some doubts.

[BtfBA]

I'm inclined to agree that Umbrella net pay would be more around the 60%. Limited company could achieve the 82% mark, possibly, depending on your IR35 status.

I have not been informed of such a gap between umbrella and ltd entities, otherwise I would be considering to establish a limited company.
Correct me if I am wrong but if I fall outside the IR35 status under an umbrella account, I expect to fall as well outside the IR35 with a ltd.

[BtfBA]

What figures did you put in the income calculator to get 82%? Under umbrella calculations, you need to consider what expenses are incurred too so this will have an effect on your take home pay.

Thanks Craig@InTouch.

Hereafter is the extraction from the calculator:

Calculation based on:

Current rate: £450 Monthly Umbrella fee: £200
Average hours per week: 39 Average weeks per year: 46
Annual allowable expenses: £6000 Tax code of 647L

I have to say though that the input of allowable expenses is just a rough figure I had randomly set.