[UK Contracting] how much to put aside after being paid?


I'm a new UK contractor, and I've just had my first payment and was wondering how much I should put aside and how I go about actually transferring the cash from my business account to my account.

I've a limited company set up, it's just me in the company, and I'm VAT registered. I've just got my first payment from my contracting job and because I'm really poor at the moment I'd like to transfer some money over to my personal account (NB I do have an accountant but really need to work this out now). I've heard people say I should save anything between 25% and 33% of what I earn for tax, and I've decided to play it save and go for the higher figure, but is this after I've deducted VAT or is that a total figure for VAT and other taxes?

So say I'd earned £1000 this month with the VAT at 20% I'd received £1200. Do I save (£1200/3) £400 or deal with VAT separately and put ((£1000/3) + VAT) £533 aside?

I'm probably going to be earning in the higher tax bracket, so should that affect how much I save now?

After I work out how much to put in to my business savings account, can I then transfer the rest over to my personal account? Should I leave some in my business account? (I tend to buy business things from my personal account and then put the receipts in a folder and record what I spend on the business to send to my accountant - I've not yet done this, so I don't really know why I'm doing this but my accountant told me to)

Payments Tax

asked May 7 '11 at 18:47
128 points

4 Answers


To specifically answer your question of how much to put aside...

You earn £1000, and charge £200 VAT on top.

Put aside £200 for VAT each month, as any minor differential from valid expenses will probably pay your yearly accounting bill.

Then put aside £500 each month to approximate the cost of income tax, NI (Don't forget you'll be paying both employer and employee NI from that £1000 ), tax on dividends, and corporation tax at the end of the year on any retained earnings (which, generally, you'll want to minimise, but you may want to plan for retaining enough earnings to keep that PAYE coming monthly whilst you are between contracts and on holidays).

If you fall significantly into higher rate income tax (in which case you're doing it wrong), or your contract is IR35 caught add another £100 per £1000.

In other words, a VERY rough reckoning of your take home from an IR35 exempt contract is 50% of your NET (before VAT) rate.

Lastly, under no circumstances "just transfer across £xxx" to your personal, or your accountant will probably have to apply the whole payment as PAYE - this may either lead to you significantly overpaying tax and NI through having too much on PAYE, or if you're unlucky (over keen to pay far too much), an overdrawn director's loan account and a statutory interest charge on the benefit in kind in addition to all of the above.

If, as sounds, your accountant is leaving you to your own devices, you're treading on thin ice - you should really be agreeing a desired and recommended rate of PAYE with your accountant at the start of your contract. He should be making recommendations for this. The remainder can be paid on a quarterly or twice yearly dividend once other commitments have been accounted for.

As all the others have said you absolutely need to talk to your accountant to decide the best demarcation for your personal circumstances.

Edited to add: As a new contractor you may feel the rule of thumb given is ridiculously pessimistic, but in ten years contracting I found it a good guesstimate. All of these will be coming out of that £1000 earned also:

  • I want to replace my laptop, upgrade other tech every xx years
  • ISP, mobile phone, assorted admin and stationery were all on the company
  • Yellow pages ad (if wanted), domain registration, web hosting costs
  • allowable travel / living away from home expenses
  • breaks between contracts - you want the salary, phone and ISP etc to continue being paid without worry for some time.

You want the year end dividend to be a pleasant surprise, rather than get into a position of breaking out in a cold sweat as you realise you need to work xx extra hours to cover upcoming expenses.

answered May 8 '11 at 03:08
2,552 points


You need to separate out what the business revenue is from your salary... You've set up a limited company, and you're the sole director and employee I'm assuming. Very broadly what you need to do is think about how you can reduce your tax liability within the structure you've set up. Stop thinking about the revenue your business is taking as your personal income, it belongs to the business. However, you want as much of it to flow your way as possible, with the smallest (legitamate) tax liability.

First pay yourself a salary in the lower tax bracket... You don't want to pay yourself a high-tax rate salary. That's just chucking money at the revenue. Set the PAYE up to deal with income tax and NI and consult the Inland Revenue / a payroll company / tax accountant if you're not sure how to do this.

The company pays corporation tax on profits... So make sure all expenses are accounted for. That includes pay and NI.

Pay yourself the rest of the profits via dividend. Given that after paying yourself a lower tax rate salary via PAYE the company is in profit, pay yourself in dividends... Dividends are a way of distributing company profits to shareholders. This is done in a pro-rata manner - so if you own 100% of the company you will receive 100% of the dividend. The dividend amount paid out is decided by the company board (you). So it could be 100% of profits. The advantage of dividends is that you don't pay employers NI on dividends (currently 13.8%).

Slight catch - even though it seems that dividend tax rates are advantageous, after you have taken into account corporation tax on the profits the effective income tax rate is the same as if you were paid the whole lot via PAYE. The saving is entirely in that you don't pay employers NI on dividends.

Consult a tax accountant to work out the optimum balance between paying yourself via PAYE and dividends.

Hope that helps.

answered May 7 '11 at 22:21
2,333 points


We take the tax out and put it in a separate bank account (usually earning higher interest) as a default part of processing any invoice. So personally I would go with option 2 and take the tax out first.

I would talk to an accountant about the tax bracket issue, there are often structures or methods of claiming more of your general life "as an expense of doing business" rather than on your taxable income and either moving you back down a tax bracket or getting you classified as a business, thus under a different set of rules completely.

answered May 7 '11 at 18:55
Robin Vessey
8,394 points


Which taxes are you talking about? If you are paying yourself you should be registered for PAYE to deal with income tax and National Insurance. In this case you should know exactly how much you need to pay as you calculate it at the time of payment (and this money has to be deposited with HMRC by the 22nd of the following month).

If you a referring to corporation tax, your company's taxable profits are reduced as your salary increases (essentially you are shifting the tax burden from the company, in the form of corporation tax, to the individual, in the form or income tax).

answered May 7 '11 at 21:53
Dan Dyer
657 points

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