As employees we are somewhat cosseted and protected from the hugely complex world of TAX, our lovely employers sort it all out for us (well they do most of the time). However, taxes and contractor take home pay is a rather different story if you go Limited and open your own company. OMG we have to sort it all out ourselves! Oh the worry.
Actually it’s all pretty simple, invoice your client, wait for them to pay you (into your business bank account) and move some money over for your salary and then decide how much you want to draw down for your profits. At this stage you might decide to leave some of it in your company for tax planning or you might want to withdraw it ALL. Of course if you did this there’s not going to be any money left to pay your taxes so you might want to leave a little behind.
However I’m getting ahead of myself – Limited or Umbrella Company what route and what’s the impact on my take home pay as a contractor?
This may seem like a daunting choice to make but actually it is quite an easy decision. If it’s a short’ish contract say less than three months or the value is less than £25,000 most contractors tend to choose an umbrella company. However, if it’s juicy three month contract on a large rate it might be worth going limited, best to have a chat with an accountant about contractor take home pay.
As a contractor I’m sure you’ll want to take home as much as possible, well working through a Limited company you’ll take home around 75% – 80% of your contract value whereas with an Umbrella Company you would only take home approx 60% – 65%.
Using an online take home pay calculator is the quickest way to get an idea of pay for you. After putting in an hourly or daily rate the calculator does the rest. The take home amount assumes full tax planning and a number of other aspects which would need to be discussed with an accountant.