Beware of take home pay calculators for contractors

Beware of take home pay calculators on Contractor Accountant websites and wild claims that “if you sign up with us, we will arrange it so you take home over 85% of your turnover”.

How practical and realistic are these calculators? To build in to the calculation that the optimum dividends are taken precisely in given tax years and assumptions that Entrepreneur’s Relief will be utilised after a precise number of years may well be misleading.

Many contractors don’t know how much they will be earning per year and when they will be will be drawing dividends – and most people draw most of their profits as dividends as soon as they can.

Some calculators class expense as income in the “take home pay” calculation – again this is misleading on the basis that a cost is a cost, whether you pay for it directly or through your company. At the end of the day, you can’t spend money and still have it!

Beware of calculations stating that the take home pay percentage is over 81% on annual turnover above the higher rate tax threshhold. Logically speaking if the corporation tax rate is 19% then as a guide the highest percentage to take home must be 81%.

Some calculators don’t even include income tax ie personal tax payable on salary and dividend income, on the basis that the figure is a gross amount that can be drawn from your company.
These calculators are often used as a selling tool to draw potential clients in by demonstrating very unrealistic take home figures.

By graeme on May 13, 2011

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