When you are a limited company contractor or a company owner in general, and you are running your own business, there are many things to consider from day to day. As a small business you have certain director duties and some of your personal details will be available on the UK public record therefore there are considerations here. Importantly, the main reason that you go through the process of setting up your own company as a contractor rather than operating as a sole trader, is first and foremost because it is more tax efficient. There are also many other pros, too, as well as some cons of running a limited company.
Please have a read of our article covering tax tips for contractors for handy tips and advice that you should know when you have your own business. This article includes our latest advice for best tax planning ideas.
We also have a first timer’s guide to contracting in the UK. This gives a full overview of what to consider when you start out as a contractor or a consultant who is operating on an independent basis. Lots of the information will also apply to many other business owners who are starting up working for themselves for the first time.
When might being a limited company owner not be the best option?
Please note, it is not always the best option for you to go through the company formation process and run your own company. In this case, you may opt for an umbrella scheme type set up. Alternatively, you could instead work on a self-employed basis. There are three main reasons why you may find that running a company is simply not worth it.
- You may be on a lower income, perhaps £25,000 or less per year.
- Your work is subject to the IR35 rules.
- You may only intend to contract or work on an independent basis for a short period.
Therefore, you should consider and take account all of this from the outset, if you are planning to set up a limited company. It is key to get your set up right from the start and as a result, you can then work on the most efficient basis.
Company Taxes and useful tax guides
If you do form a limited company and going forward you are limited company contractor, there are several company taxes that you need to be aware of. We have written some extensive guides on company taxes which will help you understand how these taxes work:
It is also a good idea to set up a Business Tax account with HM Revenue and Customs. You can then view your tax accounts with HMRC online and your accountant can do too, once they are added as an agent for each tax service.
Another useful article on this website is how to work out how much profit there is in your company at any one time.
Importantly, if you ever find yourself in a position in the future where your company cannot pay its taxes, there are certain things that you will need to consider.
The main areas to consider when you look at how to run a limited company
There are a number of things to consider, when you are running a limited company.
These include, but are not limited to:
- Setting up your company. You can do this yourself, ask your accountant to do this or use a formation agent.
- Appoint some company accountants to look after your company’s annual returns. These returns will include filings at the two official bodies in the UK which are Companies House and HM Revenue & Customs HMRC). If you are a contractor, it would be wise to find a specialist contractor accountant to look after you from the outset.
- Consider whether you will need to register for VAT and whether you should register for the VAT Flat Rate scheme or normal scheme. Nowadays, the normal scheme is the most advantageous for most contractors as opposed to the VAT flat rate scheme.
- Choosing a book-keeping / accounting system. Nowadays, most business owners choose to use accounting software which is effectively a digital service online. This makes your company’s record keeping much easier and saves time.
- Consider how will you get to work and what can you claim for this? You can use your personal car for business journeys and claim for a mileage allowance if your journeys fit certain criteria. You can also travel by other means such as train, bus or bike
How to run a limited company -considerations going forward
- Learn how to pay yourself dividends. The payment of these, are based on what your company shareholding is set up as.
- Claiming for your business expenses to save your company tax. There is a second consideration here that if you claim for any business expenses you have paid personally, your company can also reimburse these to you, rather than you standing the cost out of your own personal income (which has already been subject to tax). Business expenses will include things like travel costs, mileage allowances for your private car, private motorbike or private bicycle, office costs including use of home as office, broadband fees, phone costs, training costs, accountants fees, software, the costs for your own business website, computer equipment and business clothing (where this meets certain criteria) and many more.
- Learn about your company’s annual filing requirements throughout the year. Your accountant will help guide you here with regards to a) filing your accounts at Companies House, b) filing your company tax return, c) when to pay Corporation Tax and d) filing your company’s Confirmation Statement with Companies House. However, it is also good idea for you to keep track of what is due and when.
The advantages for a contractor limited company owner
The advantages of being a limited company contractor or a company owner in general, are:
- You will have a higher personal income. Due to the ability to be able to take your income as a mix of salary and dividend, you will pay less income tax than someone employed or self- employed. Based on what your contract rate is, this could be hundreds or thousands of pounds of extra income, every year.
- You will have professional status. Your company’s standing will also increase once you start as a contractor, and your clients may hold your business in high regard going forward. A change in perception stems mainly from the fact that the business world watches companies more closely. To clarify, this is because they have more legal duties and reporting requirements that they will need to comply with. The business world and the public can also view their accounts and corporate details on the public register.
- Limited liability for the director. One of the biggest pros of creating your own company is the limited liability protection for the director. If things go wrong in the future, your private assets are secure as a company is a separate legal entity in its own right. That is unless you have personally guaranteed a bank loan. There are also other exceptions here when a director is guilty of wrongdoing.
- You can claim on a wider range of expenses. If you can claim a cost as a business expense your company will save Corporation Tax, currently the rate of this is 19%. For any actual business costs that you pay for yourself, you can assign to your company, you can claim them back as business expenses.
- When you have your own company, you are in control of your own business’ affairs. Indeed, this includes both financial and administration type duties and you are the decision-maker for your business.
- You can be more tax-efficient (please see our article on contractor tips referenced above and plan you’re your company’s and your own finances better. The company’s Corporation Tax rate is currently 19%. Likewise, the personal tax rate for the employed and self-employed varies between 20% and 45%. What’s more, the basic tax rate on dividends is 8.75% at the moment.
- You could split the business income. When you have your own company, you have the option to transfer some shares to your spouse, or one of your family members. Dividends are then payable from the company bank account to the shareholders in line with the share ratio.
- Protection of your company name. Company names are unique, and there are no two that are the same. Once you have started your own company, its name is unique to you. Please note, this is not the case for those that are self-employed.
- You have the option to be able to defer some of your income, into the future. When you operate through your own company, you will decide what salary and dividends to pay and when you would like to pay these. If you do defer some of your income, you might then draw this at a later time, when perhaps you have only worked for part of the year, and your income in that year is lower than usual. Indeed, this is a far more tax-efficient way to take your income, rather than drawing all of it in the year when you earn it. When you do draw it all, you pay higher rates tax, on the amount that falls in the higher rates tax band. When you have your own company, you can plan around this.
- Being more credible to the outside world. When you have your own company with a corporate image, this will make your business more credible. Certain recruitment agencies in the finance and IT industries will only engage with companies. Indeed, this is normally due to the risk that comes in the contracts that they offer. If you deal with sensitive data or information, or are involved in large scale contracts, the client will ordinarily request limited liability protection from contractors who they offer contracts to. Agencies will also not offer this type of work to the self-employed. Therefore, a company can improve its competing edge.
A company provides the chance to invest pre-tax trading income into a company pension scheme. On the other hand, you can invest in a pension scheme, on a personal basis. When you invest personally, you will do so from your post-tax personal income. Your pension advisor will be able to discuss this with you and advise which is better. However, paying from your company, allows you to extract further income without incurring extra higher rates tax.
The disadvantages when you are a contractor limited company, or company owner in general
The disadvantages of running a limited company are:
Main disadvantages when you are running a limited company
- You will spend more time on administration. This will include when you do your bookkeeping and perform your filing duties such as filing of the annual accounts and Confirmation statement etc.
- You will be in charge of your company’s affairs. As part of this, it will involve meeting the various deadlines and due dates each year. The statutory records will also need keeping up to date. Even if your accountant looks after these for you, the actual duties are your responsibility.
- If you provide your contract services via your own company, the IR35 legislation could apply to relevant work assignments. Indeed, this could be the case if you have not taken any action to comply with these rules. The financial costs when you are subject to IR35 are sizeable. However, due to recent changes in IR35, the responsibility for determining the IR35 status lies with the business that is providing the work, if that business is a `medium’ or `large’ business. If the business providing the work is a `small’ business then the responsibility still lies with the contractor.
Other disadvantages when you are running a limited company
- There are extra costs in the form of accountancy fees. There is also a specific £13 filing fee with Companies House when you file the Confirmation Statement and any one-off company set up fees.
- It is not the best step if you only plan to contract for a few months, before you return to full-time employment. If you set up a company, it may prove to be more costly than it is beneficial.
Furthermore, when you come to think about closing your company, there is a particular process to follow.
When you are limited company contractor, you can delegate a lot of your duties and responsibilities to your accountant.
However, it does no harm to be more organised yourself:
- We recommend that you set up your own Business Tax Account with HM Revenue & Customs;
- We also recommend that you run your own book-keeping system. If you use an online system this will make this task a lot easier.
It is also good from the outset, to know how you should maintain your business records and how long you need to keep these for.
We have detailed all of the annual filing dates that you may need to meet as both a company director and as someone who files a Self-Assessment Tax Return.
It is a good idea to make diary notes of these and then you can track when payments are due.
Contracting does in the main, suit the majority of contractors. Importantly, the more that an individual earns, the more advantageous it is to be running a company of their own.
However, being a limited company contractor is not for everyone, though, as highlighted earlier. Some agencies will also only offer contracts to contractors with their own company. When you provide services in the type of market that many contractors operate in, such as information technology (IT), banking, management consulting, engineering, you may be more likely to secure a contract with your own company.
Finally, we explain here what to consider if you are thinking of moving from an umbrella company to your own company.
Link to Contractor Advice UK group on