Best way to earn contract or permanent employee?
why contractors earn more than permanent employeesc
Best way to earn contract or permanent employee?
Let's compare the Employee and the Contractor
If you are a permanent employee you are paid £40,000 or so a year. Taking into account the employers NI that is being paid by the employer, the gross earnings are £44,785. This is the gross earnings for the worker before tax.
Once the £4,474 NI tax is paid by the employer further taxes of £10,933 are paid in PAYE and employees NI, leaving the worker £29,067.
A contractor receives £36,372 on the same payment.
The Contractor takes home £7,305 more than the employee
Here’s how it works for the contractor:
The contractor charges £44,474 for their services and takes the necessary steps to ensure they are outside IR35. The cost to the company is the same.
Tax
The contractor pays themselves a small salary of £6,000 per year which incurs employers NI (£122), employees NI (£105), and PAYE (£97). The rest is company profit which is subject to corporation tax (£7287). This all leaves a distributable company profit of £31,065 which is declared as a dividend and will be subject to a further tax on dividends (£491).
The contractors net income after taxes is £36,372, which is 82% of their earnings. This means they need a 22% return on their money if invested to get back to where they started before the government took their cut.
Suffice it to say, being a contractor and working via a limited company has significant tax advantages. And that’s not all…
being a contractor and working via a limited company has significant tax advantages
Expenses
Everyone who works incurs expenses. You have to eat lunch. You have to take the Tube, whatever.
These expenses are “wholly and exclusively” due to the nature of your work, to cite the definition the Revenue gives
When the permanent employee eats lunch, it comes out of his or her own pocket. Not so the contractor.
The contractor pays for their lunch out of pre-tax expenses. This makes a considerable difference.
For example, lets assume a cost of £100 per week in expenses. This costs the permanent employee the full £100 from their net income. However, the contractor can claim these expenses resulting in only a £61 drop in their net income.
And the contractor can claim expenses for all of their work-related equipment, things like laptops, mobile phones, office equipment, broadband connections and so on.
Published: 16th November 2016 byAdverts
