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Contracting through a limited company

Almost anyone can set up and run their own company. You don’t need to have any specific training nor do you need to come up with a unique business idea. You simply need to be good at what you do and be willing to take on paperwork and responsibility for the good running of your company.

Whether you have been contracting for a while now, or the concept of having your own company is entirely alien to you, we can provide you with comprehensive information to enable you to engage the right professionals to help you.

Firstly, it’s important to know what you could be taking on by considering the advantages and disadvantages in relation to your individual contracting goals and objectives.

Pros & cons for limited company contractors

When you establish yourself as the sole shareholder of your limited company you will also be appointed the director of the business. As a director and owner, you take responsibility for the good running and management of your company’s affairs, both financial and administrative. Your accountant will provide professional advice and guidance as to what you can take out as dividends and salary but the ultimate decision is yours. This greater degree of autonomy is what most people leaving permanent employment are looking for. However, the downside to this is the additional responsibility in terms of invoicing, reviewing financial accounts, being accountable for tax returns as well as ensuring you comply with legal obligations and director duties.

There are also a number of administration costs associated with running a company. These include company filing fees, accountancy costs, legal and set up expenses. To counter balance this, the limited company option is often more tax efficient than the other trading options available to contractors. As both director and owner, limited company contractors can pay themselves a small salary (minimising PAYE and NIC liabilities), and providing there are profits in the company receive dividend payments, which are not subject to National Insurance Contributions.

How to start a limited company

Once you’ve made the decision that setting up a limited company is the right option for you, you will need to choose a company name and determine the division of shares if there are any other shareholders. Then you will need to register with Companies House to receive a certificate of incorporation. There are other administrative tasks involved in setting up as a limited company contractor, such as registering your company for VAT, Corporation Tax and as an employer. Luckily, there are company formation specialists and dedicated contractor accountants available to ensure you tick all the required boxes and successfully complete the set up process.

Legislation affecting limited company contractors

As mentioned above, part of the attraction for contractors to have their own limited company is the greater control they have over their earnings. However, this will only be possible if your contract is outside IR35. This piece of legislation, first introduced in April 2000, applies to those working through an intermediary (such as a limited company) and aims to identify any contractors who do not meet HMRC’s definition of ‘self-employment’.

In a nutshell the IR35 rules state that if you have the same responsibilities and control as a permanent employee, then you would more than likely be classed as inside IR35. If caught by the legislation you will have to pay full tax and full National Insurance (instead of the usual salary and dividends from the profits of your company) and your expenses will also be reduced because you would no longer qualify for them. If HMRC deems that you have not taken appropriate action to comply with the rules, the financial consequences of being caught by IR35 are significant. As a limited company contractor it is vital to have a good understanding of IR35 as it will in some way affect your daily working life and can have significant financial consequences.

limited company legislation

Limited company vs umbrella company

Having to manage your own tax affairs and comply with the ever changing tax rules imposed by HMRC can be off-putting for those considering starting their own limited company. However, if you are willing to take on a little extra paperwork and responsibility, then you could benefit from tax efficiencies which could make it worth your while.

The alternative option for contractors is to use an umbrella company. While your take home pay will not be as high, the umbrella will simplify your working life by collecting income from your clients or agency and processing any expense claims and offset them against your tax liability. Being employed by the umbrella company also means that you don’t have to worry about your tax and national insurance obligations and, as all your revenue is taxed as though you are an employee, any concerns over whether you are inside or outside of IR35 need not apply.

Ultimately, choosing between a limited company or an umbrella company can be a difficult decision. It comes down to weighing up the pros and cons of each option and carefully considering these in line with your personal preferences and the practicalities of your working situation. For a breakdown comparison between the limited company and umbrella company routes please click here.

Or talk with an experienced consultant about your options in more detail.

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Using the services of an accountant for your limited company

To help remove the headache of paperwork and provide peace of mind that your company’s tax affairs are in proper order, many contractors prefer to use an accountant to help manage their workload and save time and money in the long run. A specialist contractor accountant will proactively support you to make sure you’re making the most of your limited company. They can also advise on legislation affecting your company such as IR35 or provide advice on insurance, benefits, remuneration and profit extraction.

Whether you’re already an established limited company contractor or you are looking to set one up for the first time, Umbrella Exchange can help you find a reliable and experienced accountant, offering everything from straightforward accounting services to professional financial advice and assistance with HMRC correspondence.

When it comes to working with an accountant, remember that you can change your mind. If your current accountant is not offering value for money or they no longer specialise in the contractor market it is always possible to change. That’s the great thing about contracting – you are your own boss and can take the decision to improve your own working situation. Contact us for help and guidance with choosing a new accountant.

Ask us a question, find out how your take-home pay compares or get help with finding a new provider

Further reading:

Being a contractor gives you a range of trading options. Find out more about the differences.

Accountant - Umbrella Exchange

Find reliable accountants for contractors and the self-employed.

Limited Company - Umbrella Exchange

The paperwork and filing requirements for limited company contractors.