There are many reasons to choose a limited company. One that attracts many contractors is its tax efficiency. With a limited company setup you will invoice your client or agency for the work you have done and they will pay the whole amount into your company’s bank account. It is then up to you as the director of a company to decide how to use the money in your company. You have the option to choose how much to take as a salary, on which you will pay Income Tax and National Insurance. You can also claim from the company expenses you incur in the course of your work. The Company will pay Corporation tax on its profits, which can then be extracted as dividends. You will pay Dividend Tax on these, but they are not subject to National Insurance, providing a saving.
If you are looking to develop a long-term career as a contractor, or even develop your business beyond simple contracting then having your own company is a definite asset. You are able to choose your company’s name (so long as it is not offensive, the same as another company’s, or giving the impression of being part of a government) and this gives you the opportunity to build a brand and develop your reputation in a business-like way.
There is a level of administration and legal responsibility involved in being a company director. It is the directors’ responsibility to ensure that legally required accounts and paperwork are filed with Companies House and HMRC. Most contractors handle this by appointing a competent accountant who will look after the filings and remind you of what you need to do.
Setting up a limited company is actually very simple. You are able to do this online at the Companies House website for just a few pounds, or many accountants will do this free of charge if you sign up to one of their accountancy packages. Having an accountant do this for you can be worthwhile, since you will benefit from signing up with an accountant for support with your taxes and book-keeping, so may as well take advantage of a freebie.
Having set up your company you will then sign your contracts on the company’s behalf, in your role as a director. As director you can pay yourself a salary and as a shareholder of the company you are entitled to a share of the company’s profits, known as dividends. Your accountant will advise you on what funds are available for you to take from the company, but in most cases directors will take a salary below the Income Tax threshold and then make up most of their income as dividends, since this is a more tax-efficient approach.
As a company director you will need to make sure that your company is ready to trade. This will mean making sure that you have the relevant insurance (professional liability and public liability), registering for VAT if your turnover (i.e. total contract value) will be over £80,000 per year, and making sure that accounts and tax returns are filed with Companies House and HMRC after your company year end. Most accountancy firms offer a “full service” option which will take care of a lot of these tasks as part of an annual fee usually broken into monthly payments.
If you feel that the limited company approach is right for you, or you are already contracting through your own company, check out our guides for company directors.
- A Company Director’s Guide to Tax
- Insurance for Your Limited Company
- Understanding VAT for Limited Company Directors
- Choosing An Accountant
- Expenses for Limited Company Directors – What Can I Claim?
Advantages of a limited company (PSC).
- Tax Efficient
- Able to claim expenses
- Control over business affairs
- Company name to establish brand and reputation
- Can easily work for multiple clients
Disadvantages of a limited company