April 22, 2016 Freelancer Contractor Take Home Pay Calculations 2016/17 Are you a limited company contractor or freelancer and want to know what your take home pay will be for the 2016/17 tax year? If you are looking for a freelancer / contractor tax calculator then we have outlined some take home pay case study examples in this article and there is a table at the end of the article detailing the different take home pay amounts for various levels of income. We have made the below assumptions for the purposes of our calculations: Tax rates used are for the 16/17 tax year You are not caught by IR35 You are a UK resident, living in the UK full time We have ignored VAT You are taking a low monthly salary of £670 with the balance of extractions being by dividends (see our guide: optimum salary and dividend planning for 16/17) You have no other income outside of your company, no student loan, child benefit or other personal tax issues Before reading on, it might be worth you reading our article which outlines how dividend tax works in 16/17 as there have been some major changes from 6th April 2016. Essentially dividends are taxed as follows: If you have any un-used personal allowance then dividends in this are tax free Then your next £5,000 of dividends are also tax free (the ‘dividend allowance’) Any dividends above these and where your total income is still in the basic tax band (no more than £43,000) are charged at 7.5% tax Dividends in the higher tax band (above £43,000) are charged at 32.5% tax Dividends in the upper rate of tax (over £150,000) are charged at 38.1% tax Case Study 1 Lets look at an example of a limited company IT contractor on a day rate of £400 per day with 230 working days per year. There is one director and shareholder, extracting all available profits as dividends. Lets also assume annual allowable business costs other than salary of £5,000. The profit and loss of the company would look like this: The turnover of the company is £400 x 230 = £92,000 Less the costs of one salary at £8,040 and £5,000 of other costs (we assume all the costs are tax allowable in all these examples to keep things simple). The profit before tax is £78,960 (£92,000 turnover less £8,040 salary and £5,000 of other costs). 20% corporation tax is £15,792 which leaves post tax profits available for dividends of £63,168. If £63,168 of dividends were extracted in 16/17 the personal tax charge on these would be £11,193. The £11,193 is calculated as: The £8,040 salary leaves £2,960 of the £11,000 personal allowance so £2,960 of dividends are tax free You then have the £5,000 dividend allowance so a further £5,000 of dividends are tax free (that is £7,960 in total tax free) The basic tax band is £43,000 so if we knock off the salary of £8,040 and the £7,960 of tax free dividends that leaves £27,000 of dividends to be taxed at 7.5%, which is £2,025 of personal tax We now need to look at the dividends in the higher tax band. Total dividends were £63,168, if we take off the £7,960 of tax free dividends and £27,000 of 7.5% taxed dividends this leaves £28,208 of dividends to be taxed at the higher rate of 32.5% which is £9,168 of personal tax. If we add up the personal tax this is £2,025 + £9,168 which is £11,193 of personal tax To work out take home pay, on a turnover of £92,000 your limited company take home pay after tax is: Salary + Dividends = £71,208 Less personal tax £11,193 = cash in pocket £60,015 This is 65% take home pay after tax In actual fact your effective take home pay may be a little more than this if you consider that of your £5k of annual costs, some of these might be costs you would have to otherwise pay out of your own pocket. Case Study 2 Lets now look at an example of a limited company freelance graphic designer. Instead of working with a day rate let’s assume an average monthly billing of £4k. Lets also assume £5k of annual costs and a £670 per month salary as before. The company’s profit and loss account would look like this: The profit after tax is £27,968, lets assume again that they want to extract all these profits as dividends (rather than leaving some of them in the business). The total of salary and dividends would be £36,008 which is below the higher tax band of £43,000. The tax charge on the dividends would be £1,501 (£27,968 total dividends less £5,000 dividend allowance less £2,960 of personal allowance left leaves £20,008 of dividends to be taxed at 7.5%) So, on a turnover of £48,000 your limited company take home pay after tax is: Salary + Dividends = £36,008 Less personal tax £1,501 = cash in pocket £34,507 This is 72% take home pay Case Study 3 Next lets look at a similar scenario to Case Study 2 but this time increase the turnover from £48k to £60k. The profit and loss for the company looks like this: Assuming maximum dividends are extracted, the total salary and dividends would be £45,608 which is a little above the higher tax band of £43,000. In this scenario it would probably be sensible to not go above the £43k higher tax band and just leave the extra £2.6k profit in the business – so you would take £8,040 salary and £34,960 of dividends. If you employ the strategy of taking salary and dividends to the higher tax band but no further, please read our optimum salary and dividend guidance for 16/17 . In this scenario the personal tax on the dividends would be £2,025. So, on a turnover of £60,000, your limited company take home pay after tax is: Salary + Dividends = £43,000 Less personal tax £2,025 = cash in pocket £40,975 This is 68% take home pay but it also leaves a small amount of profit in the business. Case Study 4 For our next example we are going to bring a husband or wife into the scenario. Lets consider a limited company contractor on a day rate of £500, 230 working days and as before £5k annual costs excluding salaries. We will assume that the contractor’s spouse has no other earnings so we are going to make sure they are an officer of the company (either a director or company secretary) so they can also be paid a monthly salary of £670. We will also allocate the shareholding 50/50 between them so they can split their dividends. The profit and loss would look like this: The total profits available for dividends are £75,136, split between them equally this is £37,568. With the salary of £8,040 added this takes total income to £45,608 each. As with Case Study 3, this is only a little over the higher tax band of £43k so it would be sensible to limit the dividends so that the salary and dividends for each total £43k, even though the company could afford a little more. In this scenario the personal tax on the dividends would be £2,025 each So, on a turnover of £115,000 the limited company take home pay after tax is: Salary + Dividends = £43,000 x 2 = £86,000 Less personal tax £2,025 x 2 = £4,050 = cash in pocket £81,950 This is 71% take home pay (and it leaves a small amount of profit in the business). You can really see the tax savings here of being able to allocate some earnings to a spouse. What will my take home pay be? We have produced a table below which shows the effective freelancer / contractor take home pay in 16-17 for limited companies at various levels of turnover. This freelancer / contractor tax calculator table assumes: Single director and shareholder Salary of £670 per month = £8,040 Not caught by IR35 Other allowable expenses of £5,000 All post tax profits are extracted as dividends No other personal income to consider, or other issues such as student loan and child benefit UK resident, working in the UK full time We hope you have found this article useful – if you’re looking for an accountant who specialises in contractors and freelancers please do check us out.