The ability to earn more money is one of the main reasons why so many individuals leave full time employment for contracting.
But the amount you can realistically earn depends on the way you choose to operate. The two most common ways for contractors to work is by setting up their own limited company, or by joining an umbrella company. Both models have positive and negative aspects, and the figure you will take home each month will vary depending on which one you choose.
Umbrella Company Take Home Pay
If you choose to operate in this way, the umbrella company will essentially act as your employer. They will be responsible for collecting your pay, deducting any tax that is due, and then paying it on to you as a salary. This option minimises the amount of paperwork you have to do. However, you will pay tax in the same way as a normal employee, including income tax, national insurance contributions, in addition to company fees. As a result, you will take home a lower wage. We cover this in our tax change guide.
The total you will take home each month as an umbrella company contractor will depend on a few factors. The type and length of the contract, daily rate, personal savings and business expenses will all affect your income. It is difficult to say what percentage of your earnings you will take home, as this will vary depending on your situation. Typically, umbrella company contractors see anything between 60-70% of their pay.
There are many calculators online that can estimate your take home pay but these should only be used as a guide. A contractor-specialist accountant should be able to give you a clearer idea of the percentage you will be taking home.
Limited Company Take Home Pay
Contractors that choose to operate via their own limited company have the opportunity to make significant savings. Individuals who work under this model are able to pay themselves a lower salary and take a large percentage of their earnings as dividends. Contractors can benefit from paying themselves this way as less tax is due on dividends than salary, and they are not subject to National Insurance Contributions (NIC).
Individuals who work in certain sectors are able to opt for the flat rate VAT scheme. This was introduced by HMRC to simplify paperwork for small businesses regarding VAT. Those who qualify can charge clients 20% VAT, but only pay a percentage of that back to the Revenue.
In addition to NI and VAT savings, limited company contractors have access to more expenses than those operating under an umbrella, and are able to receive interest on the funds held in their company. Using a limited company is particularly beneficial for contractors who fall outside IR35, although contractors who operate inside can still benefit in some respects.
For the above reasons, limited company contractors can benefit from working more tax efficiently than if they were to operate via an umbrella company. As a result their take home pay is often higher. Although it is impossible to tell you the exact percentage you will take home, those who have a limited company usually see between 75-80% of their income.
Some online calculators also have the functionality to compare the amount you will take home as an umbrella company contractor, and as a limited company contractor. But as with most online calculators, the calculations will only be approximate.
Use our online calculator below to find out how much you are likedly to lend based on your day rate