The number of people working as Contractors and Freelancers continues to increase, and it’s easy to see why when you look at a few of the advantages of limited company contracting.
Contractors can typically charge more per day/hour for their services than a conventional employee and their income can also be structured to increase take home pay.
Limited company Contractors can split their remuneration between a combination of salary and dividends to reduce their overall tax liability.
Being your own boss means you control the hours you work, what you charge and the contracts you undertake. This level of control is key to achieving a good work/life balance.
When you contract through a limited company, the business is a separate legal entity from you which means your personal assets should be protected from creditors if the business incurs debt.
Through your limited company, you can claim a range of allowable expenses which can be deducted from company income to reduce taxable profit, resulting in a lower Corporation Tax liability.
Perception of limited companies is more favourable than for sole traders. Incorporation projects an image of stability and professionalism, along with a greater degree of accountability and transparency.
How to Set Up a Limited Company
Setting up your own limited company for the first time can be a daunting process, but for just £50 + VAT we will incorporate your business taking care of the whole process from start to finish.
This includes registration with Companies House, certificate of incorporation, share certificates, VAT registration and VAT flat rate scheme registration, memorandum and articles of association and more.
Below are the key steps to set up a limited company.
- Choose Your Company Name
The first step towards setting up your limited company is to choose the company name. Your company name must be unique and must meet Government guidelines. You can check if your chosen name is available on the Government website. - Choose Your Shareholder(s)
The Shareholder(s) you choose are the legal owners of the company. Their shares represent their percentage of ownership and their dividends are paid relative to the percentage of shares they own. A Shareholder doesn’t need to be a Director and it’s common for a Limited Company contractor to be the sole Shareholder and Director of their business. - Choose Your Director(s)
The limited company Directors are appointed by the Shareholders and are responsible for the day-to-day running of the business. As a limited company Contractor, it’s likely that you will be the sole Director of your business. - Choose Your Registered Office
Your limited company needs to be registered to an address, so you must choose a registered office which will be the main point of contact for any correspondence. Your registered office address will be publicly available but for £10 per month we provide our clients with a registered office service should you not want your business address to be in the public domain.
- Register Company with Companies House
You will need to register your limited company online with Companies House. This includes selecting an SIC code to classify the nature of your business and completion of an IN01 form for company incorporation. A registration fee must also be paid. - Complete Your Tax Registration
As part of the limited company set up process, you may need to register with HMRC for Pay As You Earn (PAYE), Corporation Tax and VAT (if your turnover is higher than the £85k VAT threshold). The Directors and Shareholders may also need to register for self-assessment. - Open a Business Bank Account
Having a business bank account such as Mettle, the 100% free business bank account by NatWest, is a legal requirement if you operate through a limited company. A business bank account provides separation between your business and personal finances making it much easier to calculate your taxes, track your income and expenditure and manage cash flow. - Appoint a Contractor Accountant
Appointing a Contractor Accountant is one of the best decisions you can make for your limited company. For a monthly fee, all your business and personal accounting needs will be expertly handled, giving you peace of mind that your tax and accounting obligations will be met, and your business will be operating tax-efficiently. It will also save you plenty of time which can be spent on core business activities.
Get Contractor Insurance
Contractor Insurance will protect you, your business and your income against potential liabilities should you be unable to work through illness or injury, or if a third party makes a claim against you. Various policies might need to be combined to provide the right level of cover for your business.
Offers protection for your business should a client take legal action against you due to professional negligence, omission, or an error made in services provided to them by your business.
Protects your business should a third party make a claim against you for accidental damage to their property or a bodily injury that happened due to your company’s services.
Will protect your business should an employee take legal action against you regarding an illness, injury or accidental death suffered through their employment with you.
Provides a lump sum payment should you be unable to work due to a bodily injury. The lump sum provides a financial safety net to cover costs while you recover.
Pays you a monthly benefit for up to 12 months should you be unable to work due to sickness, disease or a bodily injury.
Establish Your IR35 Status
IR35, also known as Intermediaries Legislation, is a piece of tax legislation that’s designed to prevent ‘disguised employment’ where a contractor carries out the same role as a conventional employee but operates as self-employed to take advantage of the tax benefits.
If a contractor works with full autonomy and determines the basis of the projects they work on, they are classed as self-employed and sit outside IR35.
If the client can make key decisions about a project such as when, where and how it’s undertaken as well as monitoring performance, the contractor is classed as an employee and is inside IR35. This means they must pay income tax and National Insurance through PAYE.
Meet Your Tax Obligations
Limited company Directors have the responsibility of keeping financial and accounting records for the business, filing the accounts and tax returns and completing their own self-assessment tax return.
If you expect to take a salary from your limited company you will need to make regular monthly submissions to HMRC, known as RTI (Real Time Information Submissions) to report any monthly amounts paid to you and any other employees working for the company.
If any tax and National Insurance deductions are due, the amounts should be deducted from the gross salary and the net amount paid over to yourself and any other employees.
Any deductions of tax and national insurance would be dependent on the level of salary taken and would need to be paid over to HMRC on a regular basis, usually every quarter.
If your company’s taxable turnover exceeds £85,000, or you expect it to, you will have hit the VAT threshold and must register for VAT so it can be charged on your company turnover. This means you would need to charge 20% VAT on top of your fees when invoicing a client.
If your expected turnover is below £150,000 you can opt to apply for the Flat Rate VAT Scheme through which you must charge 20% VAT, but can then pay a lower percentage to HMRC.
If your limited company is VAT registered, you’re required to keep a VAT account, pay VAT and submit your VAT returns every quarter.
All limited companies must pay Corporation Tax on their profits. The rate payable is dependent on the level of the profits generated in the year. For profits up to £50,000 the rate is 19%. For profits between £50,001 and up to £250,000 the rate is 26.5% and for profits above £250,000 the rate is 25%.
Any tax due must be paid 9 months and 1 day after the end of your accounting period. When setting up your company, HMRC will provide you with an instruction to register for Corporation Tax.
If you receive dividends from your limited company and receive more than £10,000 in a tax year you would need to submit a tax return to declare these to HMRC and any resulting tax would be payable by the 31st January.
Payments on Account are advance payments made towards your tax liability in the following year and are required if your total tax due is £1,000 or greater. These are equal installments paid in January and July.
The tax year runs from 6th April – 5th April.
Expenses
Limited company Contractors can claim allowable expenses that have been incurred wholly and exclusively for the purpose of running their business. This can result in a lower Corporation Tax bill as the expenses can be deducted from company income before tax which reduces taxable profit.
Examples of allowable expenses include subsistence, accommodation, travel, computer equipment, mobile phones, stationery, training, business insurance, accountancy fees and pension contributions.
Paying Yourself
Contracting through a limited company gives you far more control over how you pay yourself compared to a sole trader or traditional employee, giving the opportunity to maximise tax-efficiency.
Choosing an appropriate level of salary is important when it comes to tax planning. If a contract of employment hasn’t been explicitly signed, the director is not required to pay the national minimum wage. This will allow the director to select a salary level that minimises taxes for this year, typically this will be at the NI threshold of £12,570 for the current tax year.
If you employ family members, in order for salary to qualify as a deductible expense for corporation tax purposes, the salary should stand at a ‘commercial rate’, as to what you would pay to an unrelated third party.
Dividends are paid when company profits are distributed between shareholders based on the percentage of shares that they hold and are paid after Corporation Tax. The directors will be responsible for deciding whether dividends will be paid, the amount, and if there’s enough profit to pay them.
Dividends are taxed at a lower rate than income tax on a salary, so with the right structuring of your remuneration, tax savings can be made allowing you to keep more of your earnings.
Pension payments to an employee are deductible for corporation tax. If the overall salary and pension causes the company to generate a tax loss, the contributions may not qualify for tax relief. The annual allowance for pension contributions stands at £60,000 this year, which includes both personal and employer contributions. If your income exceeds £150,000, the pension allowance will be reduced.
Gorilla Accounting
We are forward-thinking, technology-focused accountants and our service is designed around limited company contractors. For a fixed fee of £110 + VAT per month, all your business and personal accounting needs will be expertly handled by your own dedicated accountant.
We provide unlimited support and advice and you will receive a same working day response to all queries submitted before 3pm thanks to our Client Service Guarantee. Full FreeAgent access is included free of charge.