Fancy the bank? 2/2
On Wednesday I wrote about an interim who had recently started an interim GM role on an NHS trust bank. Below I have provided the analysis on the income and benefits differentials of a bank vs limited company arrangement, which may help candidates to have a more amenable view on what has previously been a contractual route to be avoided at all costs.
As per Wednesday’s blog, the big deduction from gross pay when working on a trust bank is income tax and NI. The analysis below is based on an hourly rate of £73 / hour, which adds up to a day rate of approx. £550 / day, working 44 weeks of the year, to generate approximate annual income of £120,000.
PAYE on a bank • On PAYE with annual gross pay of £120,000 and no pension contributions and no expenses the net wage is £73,300(a) • If expenses of £12,000 are paid, they come out of net pay not gross pay, so the net wage reduces from £73,300 to £61,300(b) • If a pension contribution of 14% or £17,000 is paid, it would be deducted from gross pay, meaning £103,000 is taxable, which brings the net wage down to £66,000(c), BUT the package value soars to £100,000(d), because the £17,000 employer contribution to the pension is matched by the employer, making a total pension contribution of £34,000. • If a pension of 14% or £17,000 is paid, bringing the net wage down to £66,000 as per above, AND expenses of £12,000 are deducted, the net wage drops right down to £54,000(e). But again if you add the value of the £34,000 pension contribution the package value goes back up to £88,000 (f).
Limited company • A limited company with income of £120,000 with no expenses or pension results in a net take home pay of c. £81,000(g). • If expenses of £12,000 are paid, with no pensions contribution, £108,000 is taxable, resulting in a net wage of £74,000(h). • If a private pension of 14% or £17,000 is paid, but no expenses, £103,000 is taxable, resulting in a net wage of £71,000(i), but a package value of £71,000 + £17,000 = £88,000(j) • If expenses of £12,000 AND a 14% / £17000 contribution is made to a private pension, £91,000 is taxable, resulting in a net wage of £63,500(k), but a package value of £80,500(l)
1. So running the same contract with no pension contribution and no expenses: Limited company is 11% better (a vs g) 2. Same contract with no pension contribution but expenses: Limited company is 21% better (b vs h) 3. Same contract with pension contribution of 14% and no expenses: Limited company is 8% better on a net wage comparison (i vs c) BUT if you factor in the value of pensions contributions, PAYE is 11% better (d vs j) 4. Same contract with pension contribution of 14% and 12,0000 expenses: Limited company is 18% better on a net wage comparison (k vs e) BUT if you factor in the value of pensions contributions, PAYE is 9% better. (f vs l)
And remember the analysis above only assumes a 37.5 working week for a PAYE interim. Any hours over and above get paid (although pensions contributions do not apply on pay over and above 37.5 hours / week, ie you can’t contribute more to your pension by doing overtime) but otherwise extra hours on PAYE increases the income and narrows the difference, or betters the advantage across the 4 scenarios above. Readers should note that when a pension is drawn it is subject to income tax as per normal earnings. So the advantage of the pension is probably not quite as large as indicated by the analysis above which calculates on gross pension contributions not net receipts when it is drawn, nevertheless, there is no doubt that the employer matched contributions make it a very efficient way to build a pension pot.
Ultimately the pension and the expenses make the difference. Many interims of course are at the tail end of their careers or they have other investments, so the priority is maximising net pay not contributing towards a pension. Some will pay into private pensions, but what private pension has a facility where your contribution is effectively doubled? And with expenses, its far more tax efficient to pay these through a limited company, but if you want the pension, its value more than offsets the tax hit of paying your expenses out of net pay. Overall, the bank may feel most appealing to those who don’t have expenses, and do want the pension; in that scenario the overall package value exceeds what it would be running the same contract through a limited company. In addition, interims on the bank no longer have to worry about the time and expenses needed to administer a limited company (for that contract at least).
And what about IR35? Working on the bank is employment, not the provision of service through an intermediary and so IR35 doesn’t apply. That said I would imagine interims mixing paye employment and contracts through their personal service company are subtly showing HMRC that the roles they typically do could be done by an employee, which puts the individual more in scope of IR35.
Two final points to consider 1. The government has been suggesting for a while that it will make expenses non tax deductible for limited companies, and 2. from April 2016 there is a dividend tax change coming which will leave most interims a few % worse off in terms of net take home pay. So there are two financially adverse changes coming to the world which further diminish the advantages of working through a limited company. Anyone fancy the bank now?
DISLCAIMER: Every effort has been made to ensure these numbers have been correctly calculated and analysed. Please be aware they are approximate, not exact and I am not a tax or pensions specialist. If you spot any errors or discrepancies please do let me know. Big thanks to the candidate who helped me put this together but wished to remain anonymous and thanks to J for the technical pensions advice.