The many benefits of setting up as a limited company contractor may sound like an ideal next step for your career. But you may hesitate before you start typing up your resignation letter when thinking about leaving behind all the security associated with being an employee.
We’ve compared the advantages and disadvantages of both, so you have the necessary knowledge to make a more informed decision.
When you choose to operate through a limited company, you become a director of the business. You’ll be entitled to all or a proportion of the dividends, depending on the proportion of shares you hold in the company. There will be a registration process to incorporate the company, and you’ll also have a number of accountancy obligations to fulfil.
Limited company: Advantages
Depending on the company you’re currently employed by and your work satisfaction needs, contracting projects may interest you more – with a greater variety of assignments and clients keeping the work that you do feeling fresh.
One of the greatest benefits of contracting is the flexibility associated with it. Projects will vary in what they expect from you, but there’s generally much more choice in the hours you work and the locations you work in. Whilst there’s no holiday pay, you also won’t be limited to an employer’s standard holiday allowance. You may find that some contracts allow you to take some time off during them, and there’s always the option to go on holiday in between jobs.
On top of this, contractor rates are usually higher than those of employees because they require a specialist skill. You’ll likely see an increase in your earnings, especially with limited company contracting. The change in tax status generally allows you to achieve a higher take-home pay than you would otherwise.
Limited company: Disadvantages
Whilst the set-up process isn’t lengthy, it will require you to submit key details like a registered name and address for the limited company, and a signed memorandum and articles of association. If you do have any trouble registering, many limited company accountants offer incorporation as part of their services.
Accountancy and bookkeeping will also be a new task. This includes submitting a Self-Assessment tax return, which requires you to submit details of any personal income and tax paid each tax year. In addition to this, there will also be filing requirements for your company, which can include VAT returns, Corporation tax returns, PAYE submissions and the annual submission of company accounts to Companies House. Though dealing with finances like these is often seen as a disadvantage of setting up as a limited company, a specialist accountant can take this off your hands.
An employee works under an employment contract, which entitles them to a number of rights and responsibilities. This is not the same as being a ‘worker’, as their contracts work differently and they receive a more limited range of employment rights.
The employment rights you’ll receive include Statutory Redundancy Pay and protection against unfair dismissal. These can provide security that limited company contracting can’t, though there’s still protection available for contractors – as both a director and employee, they will have certain rights and can also still be entitled to parental pay such as Statutory Maternity Pay.
The set-up process and tax necessities are much less onerous when you’re an employee. There’s no registration involved – the employer deals with setting up employees, as well as paying their tax. An employee will need to provide the information required, such as their National Insurance number, but won’t have the concern of under or overpaying their tax.
Being an employee means the amount you can earn is limited. Your salary will unlikely be as high as contractor rates, and there are no additional opportunities to be more tax efficient with your earnings. The only way to increase your income is to switch jobs or request a pay rise, both of which won’t necessarily result in a higher take-home pay.
There’s also less flexibility available. Depending on your role, there may not be much variety in the work you do, and no option to make it more diverse. You’ll have to answer to an employer too – they dictate the work to be completed, and when. The company you work for might not give you much choice in the hours you work and where, meaning that there’s less opportunity to gain a work-life balance.
Weighing it up: which should you choose?
Ultimately, whether working through a limited company as a contractor or an employee is better will completely depend on your personal needs. Many prefer the security associated with having an employer, but as the guarantee of a ‘job for life’ becomes less widespread, some prefer to take advantage of the benefits gained from setting up a limited company. The higher contractor rates are a particular plus point, as this will greatly help with financial security if issues sourcing work arise.
What often stops people from registering as a limited company is a fear of being penalised by HMRC if they miscalculate their tax. At Gorilla Accounting we can provide tax planning advice, in addition to filing of your personal and company tax returns. We specialise in helping limited company contractors sort out their taxes and accountancy, so you can get on with enjoying the benefits of this operating structure without the worry.
We offer a service that suits you. Our use of cloud-based accounting software [LINK TO: What Is Cloud Accounting?] guarantees you have full visibility of your finances and will be prepared for Making Tax Digital. We also provide unlimited support through whichever communication method you choose. From assisting with the Self-Assessment tax return to offering tax planning advice, we’ll make sure running a limited company is straightforward for you.
To discover how our services could help make your limited company more tax-efficient, get in touch with our specialist team today.