Employee vs Limited Company: Take Home Pay Calculator

Chris Andreou

July 2, 2021

take home pay calculator guide

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Contractors

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Monthly Take Home Pay Calculations

When factoring in whether you should start a Limited Company or start contracting, it's useful to understand how your pay works and the assumptions behind them.

Here's a few factors you need to know:

1. Limited Company Director Salary

As a contractor or the sole director of a limited company, you'll have to factor in Corporation Tax, VAT and expenses.

Typically, limited company directors will pay themselves a salary of up to the secondary threshold (£8,840 per year for 2021/22).

This is tax-efficient, as it is the maximum salary you can take before you start paying National Insurance and taxes. At the same time, you're still able to qualify for state pension.

2. Director Dividends

Given that you're drawing a minimal salary, most of your income will be drawn in the form of dividends.

Do note that dividends can only be paid out from distributable profits, and your tax rate will change as you draw a higher amount. You can read up all about dividend thresholds here.

3. Corporation Tax

Corporation Tax is currently set at 19% for UK companies (2021/22).

This is calculated based using the formula: Total Revenue - Total Expenses.

4. Expenses

You'll have a range of different expenses you can claim as a limited company like a work laptop, business travel, insurance and accounting.

If you have expenses incurred as a result of running your business, then should absolutely claim for these.

If you don't, you'll wind up paying a higher Corporation Tax:

- £40,000 profit * 19% = £7,600 in corporation tax

- £35,000 profit * 19% = £6,650 in corporation tax

Further information on allowable expenses can be found in our limited company expenses guide.

Registering a Limited Company Guide

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Registering a Limited Company Guide

Registering a Limited Company Guide

What's Inside:

  • What is a Limited Company
  • 10 step process for setting up a Limited Company
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Registering a Limited Company Guide

What's Inside:

  • What is a Limited Company
  • 10 step process for setting up a Limited Company

Get Free Advice from an Accountant

Book a free 30 minute call with an accountant. We'll help walk through setting up your business, switching accountant or any of your tax queries. All our accounting packages come with a free 30 day trial.

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Is a contractor self employed? Guide

Is a contractor self employed?

Contractors can be self-employed, a worker or an employee. Those who are employed through an umbrella company or an agency could be considered a worker or an employee.

If a contractor is a sole trader or runs a limited company, he or she will then be considered a self-employed person.

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How to Start Contracting Guide Guide

How to Start Contracting Guide

  • What is a contractor
  • Types of contractors
  • Contractor business structures
  • Contractor accounting
  • Understanding IR35
  • Contractor insurance
  • Banking for contractors
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What is a contractor? Guide

What is a contractor?

A contractor is a professional that provides skills and services to a specific client under set terms. The terms can be for a set number of hours, a certain time frame or duration of a project.

A contractor is responsible for their own dealings and has discretion over the work they carry out.

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Dividend Calculator (Excluding VAT) Guide

Dividend Calculator (Excluding VAT)

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Guide to employing or hiring contractors Guide

Guide to employing or hiring contractors

You have an important project at hand, and you require a contractor's specialist knowledge to fill in the skill gap in your team. You're ready to hire-except that you're unfamiliar with the hiring process.

If this is your first time hiring a contractor, our article will guide you through the essentials.

We'll cover the following:

  • Sourcing for contractors
  • Assessing contractor CVs
  • Interviewing a contractor
  • Payments
  • Contract terms
  • Terminating a contract
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What are the Dividend Tax Rates? Guide

What are the Dividend Tax Rates?

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What are the advantages of contracting? Guide

What are the advantages of contracting?

The advantages of contracting are:

  • Flexibility: Contractors have a lot more control over their work life often deciding when they work, where they work and how they work
  • Increased earnings: Contractors are often paid more due to their skillset and the flexible nature of their working relationships. Additionally, contractors who operate through their own limited company can benefit from tax efficiencies.
  • Greater development: Often working with multiple clients throughout their career, contractors are exposed to a lot of opportunities to develop their skills and build on their experience in their area of expertise.
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What are the taxes, rates and allowances on dividends? Guide

What are the taxes, rates and allowances on dividends?

A dividend is money that's paid out by limited liability companies to investors, usually on a quarterly or annual basis. These payouts are based on the quarterly profits of your company as well as the amount of stock you own.

Dividends are calculated based on profits-what is left in your company after all expenses have been paid-not revenue.

Dividends can be either paid in cash or reinvested into your investment portfolio via dividend reinvestment, or via SCRIP dividends-which allow companies listed on the LSE to give investors additional shares instead of cash payouts.

Dividend tax refers to the rates by which those dividends are taxed according to HMRC. Each year, these tax rates may differ.

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How to Become a Contractor Guide

How to Become a Contractor

So, you're thinking of becoming a contractor.

There's probably one of three reasons driving this:

You've received a Job Offer

You've just received a job offer, and now need to decide on whether to set up a limited company, umbrella company or become a sole trader (or you may not have the choice in deciding).

You're in the right place.

This guide will walk you through the best company structure for you, accounting support, VAT, business services you need to consider and finding new opportunities.

You want to increase your pay

You'd like to increase your pay by switching from permanent roles to interim/ contractor roles.

Contracting can be very lucrative.

You'll need to be comfortable with a certain level of risk (short notice periods), increased monthly admin (as a Limited Company) and less benefits than being an employee (paid leave, sick days).

However, you'll earn more, get greater flexibility and hopefully grow a consulting business.

Project Flexibility

Getting multiple requests for your services? Amazing.

Setting yourself up as a contractor through a Limited Company means you can start expanding your client base rapidly and work on different projects a few days a week.

You can still set this up as a current PAYE employee of a company, and this can be a great stepping stone to launching your own business.

Let's talk about the right business structure for you.

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How do I become a contractor? Guide

How do I become a contractor?

To become a contractor, you need to:

  • Do your research: The first step you'll need to do is to conduct in-depth research, and think through various important factors-from finances and tax implications, to lifestyle and business opportunities-to ascertain if becoming a contractor is the right decision for you.
  • Decide on how you'll operate: As a contractor, you may operate as a sole trader, through your own limited company, or work with an umbrella company or recruitment agency.
  • Develop a business strategy: Strategic planning isn't set in stone-but working out a plan is still helpful, as it is a way for you to consider multiple perspectives, identify potential opportunities and pitfalls and conceptualise back up plans you could fall back on.
  • Get your business finances and insurance sorted out: Setting up a business bank account, registering a company, determining the level of accounting support you need and investing in business insurance are important aspects you need to sort out before you begin contracting.
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Is a contractor an employee? Guide

Is a contractor an employee?

Contractors can be self-employed, a worker or an employee. Those who are employed through an umbrella company or an agency could be considered a worker or an employee.

If a contractor is a sole trader or runs a limited company, he or she will then be considered a self-employed person.

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What are dividends and why are they important? Guide

What are dividends and why are they important?

A dividend is a payment of profit that a limited company distributes to its shareholders. This is the money remaining after all business expenses and liabilities, as well as outstanding taxes (including VAT and Corporation Tax) have been paid off.

Dividends are important as they are a tax-efficient way to pay yourself from your limited company. Other than drawing dividends as income, you may also consider paying dividends into a pension fund, ISA or to family members.

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Dividend Calculator with VAT Flat Rate Scheme Guide

Dividend Calculator with VAT Flat Rate Scheme

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What are Dividends? Guide

What are Dividends?

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Dividends Guide Guide

Dividends Guide

  • What are dividends?
  • Dividend tax rates and allowances
  • Paying taxes on dividends
  • Dividend FAQs
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Take Home Pay Calculator Guide

Take Home Pay Calculator

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What is Dividend tax? Guide

What is Dividend tax?

A dividend is money that's paid out by limited liability companies to investors, usually on a quarterly or annual basis. These payouts are based on the quarterly profits of your company as well as the amount of stock you own.

Dividend tax therefore refers to the rates by which those dividends are taxed according to HMRC. Each year, these tax rates may differ.

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Contractor Business Services UK Guide

Contractor Business Services UK

Firstly, we'll start with the services that we provide which covers the critical things you'll need to start and operate your contracting business.

For those just getting started, we provide free company registration on Companies House. This is typically done within 24 hours of submitting your details to Forma. It can take under 5 minutes to provide all your details and we'll just need a proof of ID and proof of address for each of the company directors.

We cover all of your key company filing requirements like annual accounts, confirmation statements, corporation tax and ensuring you meet all filing deadlines.

We also help with your annual Self Assessment which is a requirement for all company directors.

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Employing contractors Guide

Employing contractors

There are a few steps you'll need to consider with hiring contractors. These include:

  • Sourcing for contractors
  • Assessing contractor CVs
  • Interviewing a contractor
  • Payments
  • Contract terms
  • Terminating a contract
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What are the disadvantages of contracting? Guide

What are the disadvantages of contracting?

The disadvantages of contracting are:

  • Uncertainty: Due to the flexible nature of their working relationships, contractors aren't guaranteed work after the end of assignment or project.
  • Responsibility: Not only is it the responsibility of the contractor to find work, they are also responsible for their own finances.
  • Employment rights: As a contractor, you generally wouldn't find yourself holding employment rights that permanent employees benefit from.
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Registering a Limited Company Guide