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. 

contractor-vs-full-time-employment

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:

  • There are certain expenses you are unable to claim as an employee which you can potentially claim as a contractor. For example travelling expenses  - these can be significant.
  • Once your earnings as an employee exceed £100,000 then you start to lose the benefit of the personal allowance. Your earnings as an employee at this level can potentially be taxed at an effective rate of 60%. Operating as a contractor through your limited company potentially enables you to manage your tax liabilities more effectively. 
  • The calculations assume your spouse (or civil partner) has no earnings outside of your limited company. If your spouse (or civil partner's) circumstances change then equally this may impact on any tax savings available.
  • The potential impact (if any) of the proposed changes to IR35 and the private sector are not known yet.
  • Some people prefer the security and benefits (e.g. holiday and sick pay) of full-time employment over contracting. Though it's debatable how secure full-time employment is in the current marketplace.

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 richard@tfaaccountants.co.uk.

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