Contractor salary

Introduction?

What contractor salary level should you take when running your company in the United Kingdom? Most importantly, when you are in business for yourself, you can decide on your level of director salary. This is not the case when you work through an umbrella company or are employed full-time.

When deciding on your pay level, a contractor’s tax-efficient salary is something to consider as part of your overall tax planning. As a result, this will help you maximise your take-home pay.

Therefore, many limited company contractors and independent consultants who work in the IT field (and other industries) will need to decide on the level of IT contractor salary that their company pays them. Furthermore, the salary of a contractor can also depend on other factors.

The salary subject is one of the most common things a contractor needs to consider when running their own company.?Notably, you could take a low salary, a middle-level salary, or even a high-level salary, and the choice is yours. Therefore, you can consider what is best for you and ask your accountant to process this for you going forward.

Other initial considerations

If you are married or have a partner, you might consider?paying your spouse a salary. You can do this if they do some work for your company. As a result, this will help save company tax and also give your spouse a wage.

Furthermore, depending on what your spouse earns, it may also be an idea to consider using the transfer of the?Marriage Allowance.

Company profits

When your company pays you a salary, this will be out of your company profits. Your company profits are calculated by deducting all business expenses from the company income. Therefore, there should be enough remaining to pay you your chosen salary after working this out.?

Contractor salary -what to consider?

Things to think about when you decide on your director’s salary

There is no minimum wage requirement when you are a company director. That is unless you have a contract of employment with your company.

When considering what salary level to take, you must consider various factors. Most importantly, these will include being tax efficient and paying enough to justify any pension contributions. This may even involve paying a higher salary, should you have reasons for doing so.

Each contractor and independent consultant will have their personal preference regarding what they decide on as their level of contractor salary.

If you do not have any reasons for taking a higher salary for pension or other reasons, you might aim for a tax-efficient mix of salary and dividends. Notably, these are part of our handy guide that covers?tax tips for contractors and small business owners.?

Salary for a contractor -the options available

You could take a director salary above the NI threshold (￡823 per month) and take the rest of your earnings as dividends. As a result, this is tax-efficient for you.

In the tax year 2022/23, the tax-free personal allowance is ￡12,570.

You could take a higher salary than ￡823 if you so wish.

NI thresholds

The National Insurance thresholds are as follows:

• Employers are required to start deducting NICs on earnings above the lower earnings limit (LEL). In 2022/23, this is set at ￡533 per month or ￡6,396 per annum. At this level, benefits will accrue for the employee’s state pension.
• The primary threshold (PT) for employee contributions is set at ￡823 per month or ￡9,880 per annum for 2022/23.
• The upper earnings limit is set at ￡4,189 per month or ￡50,270 per year for 2022/23.
• The secondary threshold (applicable to employers) is set at ￡758 per month or ￡9,100 per year, and there is no upper earnings limit for employer NIC liabilities.

NI rates

The rates for National Insurance are:

• 13.25% employee NI for income between the primary threshold and the upper earnings limit.
• 3.25% employees NI for income over the upper earnings limit.
• 15.05% employers NI for income over the lower earnings limit for NIC Classes 1, 1A, and 1B.

Income tax rates

A salary above the current personal allowance of ￡12,570 will also incur income tax at 20%.

The current income tax rates in 2022/23 are:

Personal allowance ￡12,570

Basic rate tax 20% ￡0-￡37,700

Higher rate tax 40% ￡37,701-￡150,000

Additional rate tax 45% ￡150,001 & higher

Suggestion

Due to the increase in National Insurance rates and the National Insurance bands in the tax year 2022/23, an optimum salary is now ￡992.33. This is because your company will make more Corporation Tax savings even though there is employer’s NI payable above ￡533 per month. This salary level is optimal if you have no other sources of income, such as rental profits, self-employment profits, pension income, etc., that will use up your personal allowance. If you have other income, ￡823 will be the optimal salary.

Indeed, the above does assume, of course, that you will fall outside of the IR35 rules. The rules came into force in the public sector on 6 April 2017 and the private sector on 6 April 2021. The IR35 reform effectively means the duty of determining the IR35 status of a contractor’s work falls on the service provider rather than the contractor. At the moment, this only applies to large and medium companies.

Tax calculators online can help you work out the tax bills (PAYE tax and NI) on your chosen salary level. This website aims to bring you a calculator in the future.

An example of being tax efficient

Many IT professionals, or other independent consultants, may take a salary of ￡992.33. In addition, if they are earning enough through their company, they could decide to take the following as annual earnings from their company:

IT contractor salary

12 x ￡992.33 =?11,908.00

Dividend 12 x ￡3,190 = ???38,280.00 ?

Total income ?????50,188.00

An income of ￡50,188 (assuming that the contractor has no other substantial income from other sources) would leave the individual under the higher rates tax level (￡50,270) in 2022/23. This level and mix of income is tax efficient as you would be both maximising your basic rate tax band and not be incurring any personal higher rates tax.?

Pension considerations?

When you make pension payments, the general advice is your salary should be at least as much as your pension payments. Your pension adviser can let you know here. Notably, they can advise about what salary level you need to be able to make your pension payments.

However, if your company makes employer pension contributions, there is no requirement for your salary to be as much as these, unlike when you make such contributions yourself.

You have worked at several different employers in the past and have various pension schemes. As a result of this, something that you may be interested in is?pension consolidation.?

Final thoughts

Many contractors choose the most tax-efficient option by taking a director salary just above the NI threshold. As a result, they can then decide to take the rest of their earnings as dividends from their company.

Another helpful guide on taking income from your company is the most tax-efficient way to pay yourself.

Link to Contractor Advice UK group on

LinkedIn?https://www.dhirubhai.net/groups/4660081/