If you get a contract job such as IT or services in the UK with a daily or hourly rate, you will wonder how you can get a more favorable contractor tax rate or after tax net contractor income. Usually, you might have 2 contractor tax solutions in terms of getting paid:
1. Umbrella company for contractors:
There are several umbrella companies in the UK who offer big tax advantages for contractors. When you choose an umbrella company, you are their employee deployed on your contract employer premises on paper. And your contract employer pays your salary to the umbrella company which then pays your net salary after calculating taxes.
Usually, many umbrella companies are able to give you 75 to 85% of your contractor salary as net income.
In my personal experience, I had chosen an umbrella company who was able to give me back 85% of my contractor income a couple of years ago.
2. Contractor company set up & tax:
With this option, you can set up a limited company or get paid via your existing limited company. The employer pays your salary to your business bank account without deducting any tax and you declare your contractor income along with your other income once a year. And you generally pay 25% corporate tax on your income depending on your company’s annual revenue. You will have to pay national insurance contribution and personal tax on your dividends as well.
In our opinion, this is the least desired option as it will cost you more.
Contractor Tax Calculator
Presuming that you will get 85% net contractor income tax from an umbrella company and 75% from a limited company:
|Daily Rate||Monthly Income (22 Days)||Umbrella Company (85% Net)||Own Company (75%)|
Contract vs Permanent Work Calculator:
Did you ever compare contract income versus permanent job income? Here is how each daily rate in a contract job (using an umbrella company paying 85% of contract gross income back to you) would correlate with a permanent job:
|Daily Rate||Weekly||Monthly||Annual||Net monthly||Annual||Net Monthly|