Working out your contractor earnings online: Top tips for using a contractor calculator

You don’t have to look very hard to find one calculator or potentially a few calculators on individual websites associated with contractors.

But; asks chartered accountant Graham Jenner of Jenner Accountants Ltd, how can you make sure that once you press the ‘equals’ sign, the results you’re getting are meaningful?

Four top tips for using a contractor calculator

Here are a four top general usage tips for using an online calculator to work out what might be incoming to your pocket:

1. Make sure you are using a calculator for the correct tax year, if the calculator shows you which tax year, for example 2024-25, is available.
2. If you want to calculate your net income for a contract that spills into an upcoming tax year, you may find that there isn’t yet a calculator available, for that year. You can obtain a rough guide by using the current year’s calculator. Most changes between tax years relate to inflationary increases in tax bands, and so are relatively insignificant.
3. Where the chancellor has announced significant changes (or you aren’t sure whether there will be significant changes, such as today’s Spring Budget 2024), speak to your accountant before relying on any figure.
4. Most calculators assume that you will have the same level of income and expenses throughout the year - they have to – otherwise they would just be too complicated.

The result is then expressed as net annual income – although it may also be expressed as a monthly or weekly amount, (by dividing the annual figure by 12 or 52).

Since you are probably more interested as a contractor in the monthly or weekly figure, make sure that, where the calculator asks for an annual figure, you enter the amount that would apply, if you had that contract for a full year.

When using a contractor calculator, know its limits!

Online calculators have quite a long list of limitations.

As mentioned, get your accountant to guide where you are unsure. Or even better, supplement your accountant’s advice or figures whenever you go to use a contractor calculator, which are restricted because

1. They are very often only relevant if your contract is outside IR35.
2. They do not account for other income e.g. pension or rental income.
3. They do not consider previous contract earnings and tax in the current tax year.
4. They do not consider the scenario where you do not have a contract for the rest of the year.
5. They make certain assumptions (generally valid assumptions but, nevertheless, assumptions) about the tax-efficient combo of paying a small salary and the rest of the income as dividends.
6. They may either:  --- assume that ALL available profits are paid as dividends, which may not be appropriate (see below), or -- they stop short of calculating the tax on dividends on the basis that you may not take all the available profit as dividend (also see below).
7. Where the calculator assumes that all available profits are paid as dividends, the calculated net income will be lower than might be achieved if you can take some of those dividends at another time. This is particularly relevant where taking the maximum available would take you into higher rate or additional rate tax. If this is the case, by all means use the calculator as a guide, but speak to your accountant about the tax planning around taking only some of the available dividends.
8. Where the calculator stops short of calculating tax on dividends, then you will need to take account of the additional tax on dividends you take. This ‘dividend tax’ amounts to 8.75% for dividends falling within the basic rate tax band £12,571 – £50,270; 33.75% for those falling in the higher rate tax band £50,271 – £125,140 and 39.35% for those falling in the additional rate band £125,140 upwards. These can amount to significant sums and you might be advised to look for a calculator that does calculate the tax on dividends (subject to the shortcomings outlined above).

So, how are contractors using an online calculator meant to interpret their net income where these eight limitations, above apply?!

Let’s now focus on the scenario many contractor limited companies finds themselves in:

Using a contractor calculator on an inside IR35 contract

The most likely reason that you are aware your contract is within IR35 is because you  have been issued with a Status Determination Statement (SDS) by the end client – in that case, use an ‘umbrella company net income calculator’ as a reasonable guide to your net income

Alternatively, if the end-client won’t allow you to use your limited company, you will probably need to use an umbrella company – assuming you want to take the contract.

So, as a guide, use an umbrella company calculator, ideally in addition to asking the brolly itself for the key particulars.

What about old IR35? Or no Status Determination Statement?

If you are free to use your own limited company, and have not been issued with an SDS (perhaps because the end-client is a ‘small’ company or the end-client is outside the UK with no UK connection), let’s say that you yourself have concluded that the contract is caught by IR35. To tot up your take-home, it would be worth consulting your accountant for an indication of the net income. But you could also use an umbrella company calculator to provide a reasonable (though slightly low) estimate of your net income.

You have other income in the tax year, or no contract income for part of the year

This is another typical scenario that freelance consultants face.

Irritatingly, most calculators can’t easily be tweaked to account for other income. Trying to fudge the figures is complicated and again, a safer bet is to ask your accountant for an estimate of the net income from the contract.

A few final recommendations when about to tap an online contractor pay calculator

• Don’t overestimate expenses – you can give yourself a false impression of net income. Underestimate instead, and you may have a pleasant surprise at the year end when your tax is not as high as you thought!
• Use the calculator(s) more as a guide as to whether a contract is worth taking. Take-home pay calculators are good for comparing two contracts, particularly where you actually prefer the contract which has a lower rate, as you can now see how much worse off you might be comparatively, per week. You might decide that, despite the slightly lower net income, you are happy to accept the contract with the lower rate.
• Don’t expect the calculator to give ‘accurate’ results – there are a lot of estimates and assumptions involved.
• For a calculation tailored to your personal circumstances – a ‘human calculation,’ ask your accountant.