Reply to: Simple maths problem: Take home pay

[PhilAtBFCA]

Net Income Calculation

Hi Major Major, I put your details into our Spreadsheet Comparison Tool and came up with the following:-

Limited Company Outside IR35 Net Income 60%.

The figure is low when compared to many scenarios I have seen as your expenses of £20k affect the figure.

When the expenses are factored in then Net Income is 76.51%.

You can get the Comparison Tool at our website by registering ( its free ), its in the business library folder under tools and documents.

If you PM me then I will send you the one I have done for your situation, likewise anyone else who would like a copy.

Here is a quick summary of the figures ( There is some rounding here !):-

Contract Revenue £120,280 ( Includes VAT Flat rate Scheme Profit)
Overheads & Expenses £31,350
Profit £89,929
Corporation Tax £17,785
Dividends £71,141
Higher Rate Tax £10,847

Net Annual Income £69,001 ( 59% of £116,000)
Net Annual Income with Expenses £89005 (76% of £116,000)

As a matter of interest, deciding to take a lower salary , say £5600 would boost your net income by arround £800.

You could also boost your net income % by contributing to a pension through the company.

Lastly, you could also say your net income was actually 71%, it does depend on how you look at it. But for the sake of discussion, if you "ignored" expenses then you contract revenue is £96,000 ( net of expenses ), which means your net income is 71% ( the £69000 as a % of £96,000).

You could look at it in this way as the £20k expenses is what your company needs to spend to get your contract fullfilled, so its not really your income.

Its just another way of looking at it, which is why we quite often end up looking at the % net income including expenses and pension contributions, in your case 76%.

Hope thats of some help.

[pmeswani]

You need an accountant (or a new accountant) to look at your affairs and optimise for tax purposes. It might be worthwhile leaving 50% in the business and extracting later as capital but even if you do that yuo still need to look at what you are doing with the 50% you are taking. Optimal strategy is generally salary of £6,000 per annum with rest in divis. You could obviously look at your expenses as well. Flat rate VAT registration might also kick up your income by about 5%.

Ideally, the poster in question needs to find an accountant that has some knowledge of IT Contracting. Has a basic understanding of IR35 (doesn't have to be comprehensive). Get the contract reviewed by an IR35 specialist such as Abbey Tax or whoever specialises in IR35. A golden rule... there is no shame in spending a bit more money for a better service. But there is shame in spending money on something that is not in your best interest.

[Alan @ BroomeAffinity]

pmeswani has given good advice there. You need an accountant (or a new accountant) to look at your affairs and optimise for tax purposes. It might be worthwhile leaving 50% in the business and extracting later as capital but even if you do that yuo still need to look at what you are doing with the 50% you are taking. Optimal strategy is generally salary of £6,000 per annum with rest in divis. You could obviously look at your expenses as well. Flat rate VAT registration might also kick up your income by about 5%.

[Major Major]

Cheers all.

Sounds like I'm not too far off the mark then - replies all much appreciated as I don't have any contractors around me to chew financial fat with...

Still not convinced my accountant is being creative enough though and that with more money for a better accountant I couldn't save some cash through some better thinking....

[mailric]

So, if your average day rate is £500, you go for an annual salary of £500,000. Neat trick.

ah, thats why my finances are so fvcked up. Have to sell the Pagani Zonda

note: * 100 that should have read

[pmeswani]

What would you suggest, old school small payments followed by a quarterly divi? With the odd grand or so in the pension etc?

I can't comment what you should do without knowing your personal circumstances (and even if I did, I would still refer you to an Accountant. ).

I'm happy with taking a small salary (equiv to my annual allowance), with a monthly dividend (I currently pay a higher rate, as my personal circumstances dictates the extra cash, but will hopefully give myself an effective pay cut once my circumstances improves) and (legitimate) expenses along with keeping a sufficient amount in the business account for a rainy day with the idea of putting whatever is left at year end into a pension scheme (employer led or from my own bank account) and making sure there is enough to pay for CT (at year end) and VAT (every quarter). If there are any tax-free benefits that can be used from the company that I would really need, then great.

I employ an Accountant who does all the difficult stuff for me. I'm starting to learn how to use Sage Instant Business Package so that I can start looking after my own finances at some point in the near / distant future. Decided to let an Accountant do all the hard work relating to my business as I am numerically illiterate (sp?) when it comes to financial management. (And yes, I do have control of my business before anyone asks me again!)

[stingman123]

What would you suggest, old school small payments followed by a quarterly divi? With the odd grand or so in the pension etc?

[pmeswani]

Problem is (and I am only beginning to realise it) Is that is was an accountant that suggested a 50/50 split!

Maybe I need help after all?

First step... get a new accountant.

[stingman123]

Ironically, if you paid an accountant to look after your books, you would take home more than you are doing now. It might be worth checking out, because when times are tough, looking back and saying "I couldn't be ar$ed with "wage shifting"" may turn out to be a day of sad reflection.

Problem is (and I am only beginning to realise it) Is that is was an accountant that suggested a 50/50 split!

Maybe I need help after all?

[max]

As a weekly wage, it puts me into the higher tax bracket, but I honestly cannot be ars*d with "wage shifting" and the like

have you considered improving you finances, taking the money you'd have been taxed and doing something useful with it? Maybe roll your smokes with £20 bills perhaps. Got to be less wasteful than letting Prudence get his mits on it.

[hyperD]

As a weekly wage, it puts me into the higher tax bracket, but I honestly cannot be ars*d with "wage shifting" and the like

Ironically, if you paid an accountant to look after your books, you would take home more than you are doing now. It might be worth checking out, because when times are tough, looking back and saying "I couldn't be ar$ed with "wage shifting"" may turn out to be a day of sad reflection.

[Bluebird]

As a weekly wage, it puts me into the higher tax bracket, but I honestly cannot be ars*d with "wage shifting" and the like

Fine, I guess if you want to pay more tax than you need to why not?

But don't forget that Tax Avoidance is a recongnised legal practice - heck most of the MPs do it to some degree.

Tax evasion, however is different.

By the time you take account of pensions, holidays & sickness I would have though you'd be better off doing a permie job...

[stingman123]

how do you pay the £1k to you?

As a weekly wage, it puts me into the higher tax bracket, but I honestly cannot be ars*d with "wage shifting" and the like

[Bluebird]

2K a week in the business, 1K stays in the business and 1K to me

how do you pay the £1k to you?

[stingman123]

What do you mean by 50/50 split?

2K a week in the business, 1K stays in the business and 1K to me