Contracting through a Limited Company

There are plenty of reasons to choose a limited company, but perhaps the most attractive of them all is the tax efficiency it provides to contractors. In a limited company set up, clients and agencies are directly invoiced for any work you do, with the whole amount going straight into the company’s bank account. Then, as the director of the company, it is up to you as to how the money is used within the company. Decisions about how much goes towards salary, payments for Income Tax and National Insurance, and how much you can claim as company expenses, are all up to you.

Further, the company will be liable to pay Corporation Tax on its profits, which can later be obtained as dividends. Pending this, you will also pay Dividend Tax, but as this is not subject to National Insurance, you are guaranteed to make some savings.

Taking ownership

If you are looking towards the future in terms of developing a long-term career as a contractor, or simply just growing the business beyond contract work, your own company will definitely prove beneficial. Deciding your own company’s name (provided it is not offensive, the same as another company’s, or gives the impression it is a government-related initiative) will allow you to establish a brand and reputation from the beginning, in an incredibly professional manner.

However, there are a number of administrative and legal elements to consider as a company director. First and foremost, it is the director’s responsibility that all legal documents and financial accounts are filed with Companies House and HMRC. Whilst most contractors often appoint an accountant to complete the filings and remind you of other such administrative tasks, it is possible to do this yourself.

What do you need to do?

The prospect may seem daunting, but the reality is that setting up a limited company is actually fairly simple and can be done online on the Companies House website for just a couple of pounds. Alternatively, having an accounting firm on board is handy in such situations as they will often do it for free if you subscribe to one of their accountancy packages. Beyond this, accountants will provide support with all matters relating to taxes and bookkeeping, so it is worthwhile signing up with an accountant and making the most of freebies like this.

Once your company is registered, you as the director are required to sign documents on your company’s behalf. You can pay yourself a salary, and take a share of the company’s profits – formally known as dividends – as the shareholder. This is where your accountant will prove most useful, as they will advise on what funds are available to take from, and how much. Often the case is that directors take a salary below the Income Tax threshold and then make up the rest from dividends due to the more tax-friendly approach it provides.

As the acting company director, it is absolutely vital that your business is ready to trade, meaning that it has the relevant insurance (both professional and public liability), is fully registered for VAT if you anticipate the turnover (i.e. total contract value) to be over ￡80,000 per annum, and all financial accounts and tax returns are filed at your company’s year end with Companies House and HMRC. Yet again, the majority of accountancy firms will offer a “full service” option which will take the workload off your hands for a yearly fee, and can be broken into monthly payments.

Going forward

Ultimately, the advantages of a limited company (PSC) include:

• Tax efficiency
• Ability to claim expenses
• Control over business affairs
• Ownership of a company name to establish brand and reputation
• Freedom to work for multiple clients

However, some of the disadvantages of a limited company are:

• Significant amount of paperwork required
• Legal responsibilities of a director
• The need to arrange your own insurances
• Not suitable for one-off short-term contracts
• You are required to be aware of IR35 status

If you believe the limited company approach is the approach you wish to proceed with, or you are already contracting through your own company, have a look at our guides written specifically for company directors:

• A company director’s guide to tax
• What insurances do I need for my Limited Company 
• Understanding VAT for limited company directors
• Choosing an accountant