Contractor vs full-time employment 2019-20
You may be contemplating your first move into contracting or tempted to take up an offer of full-time employment. If that's the case you'll want to consider the benefits of being a contractor vs full-time employment in the current tax year.
If we take a look at this example below, you'll perhaps get a better idea of the benefits of being a contractor vs full-time employment.
Example
Bruce has a contracting role at a rate of £550+VAT per day for 240 days in a year and operates as a limited company. The annual costs for the business are Approximately £13,500. Both he and his wife Natasha are directors and equal shareholders. They also have 3 children and claim child benefit.
He has also been offered full time employment with Stark Group Ltd a a salary of £100,000 per annum.
So what would be the tax impact of taking up full-time employment?
Tax calculation as an employee
Full-time employment | £ |
|---|---|
Salary | 100,000 |
Less: Income tax | (27,500) |
Less: Employees NI | ( 7,000) |
Less: Child benefit | ( 2,501) |
Take home pay | 62,999 |
Tax calculation contracting through a limited company
Company's tax position Turnover (£550 x 240) | £ 132,000 |
|---|---|
Less: Expenses | ( 13,500) |
Less: Director's remuneration | ( 17,264) |
Company's taxable profits | 101,236 |
Less: Corporation tax (19%) | ( 19,235) |
Profits available to distribute | 82,001 |
Bruce and Natasha's position is as follows:
£ | |
|---|---|
Salary | 8,632 |
Dividends (50% of distributable profits) | 41,000 |
Total | 49,632 |
Less: Personal allowance Taxable income Dividends taxed at 0% Dividends taxed at 7.5% Tax payable Net amount Total net cash payable (£46,997 x 2) | (12,500) 37,132 2,000 35,132 ( 2,635) 46,997 93,994 |
As you can see in this example the net cash available as an employee is £62,999. Whereas as a contractor the net amounts received (after corporation and income tax is £93,994). Additionally Bruce and Natasha will be entitled to claim child benefit of £2,501 as they aren't caught by the child benefit tax charge.
The additional earnings of £32,000 as a contractor equates to extra take home pay of £33,496. So the extra earnings of £32,000 are effectively received tax-free.
We would also make the following comments:
The above list is by no means exhaustive and there are many factors to consider when making a decision to start contracting. Please feel free to contact us if you would like further guidance
For more useful information, check out our Ebooks here.
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].