When you are a limited company contractor or a small business owner in general, there are many things to consider from day to day. Apart from running your own company and completing all the daily tasks as a contractor, you will also have official duties as a director.
As part of running your company, you will have specific director duties to adhere to. Furthermore, some of your personal details will be available on the UK public record; therefore, there are considerations here. Notably, the main reason you go through 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 read our article covering tax tips for contractors. This contains many handy tips and advice that you should know when you have your own business. This article includes our latest guidance for the best tax planning ideas.
We also have a first-timer’s guide to contracting in the UK. This gives a complete overview of what to consider when you start as a contractor or a consultant operating independently. Much of the information will also apply to many other business owners working for themselves for the first time.
When might being a limited company owner not be the best option?
Please note that 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 you may find that running a company is 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 independently for a short period.
Therefore, please consider this if you plan to set up a limited company. It is key to get your set up right from the start. As a result, you can then work on the most efficient basis.
Contractor taxes and helpful tax guides
If you form a limited company in the future as a limited company contractor, there are several company taxes that you need to be aware of. This will include VAT registration and considering whether you are better off under the Flat Rate VAT or the standard VAT scheme. It will also include setting up a PAYE scheme if you intend to pay yourself and any other person a salary from your business in the future.
We have written some extensive guides on contractor taxes which will help you understand how these taxes work:
HMRC Business Tax account and other areas
Setting up a Business Tax account with HM Revenue and Customs is a good idea. You can then view your tax accounts with HMRC online. Your accountant can also view this once they are added as an agent for each tax service.
Another good article on this website is how to work out how much profit there is in your company at any 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 several 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, or use a formation agent. As part of this, you will need to choose a registered office, who the director(s) are, who the shareholder(s) are, your SIC code (trading activity) and whether you would like a company secretary (nowadays most small companies do not have one as it is no longer a legal requirement).
- Appoint some company accountants to look after your company’s annual returns. These returns will include filings at the UK’s official bodies [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.
Further initial considerations when running your own company
- Consider whether you will need to register for VAT and whether you should register for the VAT Flat Rate scheme or the standard VAT scheme. Nowadays, the standard scheme is the most advantageous for most contractors compared to the VAT flat rate scheme.
- Choosing a bookkeeping/accounting system. Nowadays, most business owners choose to use accounting software, which is an online digital service. This makes your company’s record-keeping more accessible and saves time.
- Consider how you will get to work and what you can claim for this. You can use your personal car for business journeys and claim a mileage allowance if your trips fit specific 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 is based on what your company shareholding is set up as.
- Learn about your company’s annual filing requirements throughout the year. Your accountant will help guide you here with regards to:
- Filing your accounts at Companies House.
- Filing your company tax return.
- When to pay Corporation Tax.
- Filing your company’s Confirmation Statement with Companies House.
However, it is also a good idea for you to keep track of what is due and when.
Please ensure you claim all your business expenses to save your company tax. There is a second consideration here 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:
The advantages for a contractor limited company owner
The advantages of being a limited company contractor or a company owner in general are:
- When you run a limited company, you will have a higher personal income. Due to the ability 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 your contract rate, 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 in the future. A change in perception stems mainly from the fact that the business world watches companies more closely. To clarify, UK directors 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. This is because 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 a broader 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 which you pay yourself, you can assign them to your company and 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. You can also plan 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%. Moreover, the basic tax rate on dividends is now 8.75%.
- You could split the business income. When you have your own company, you have the option to transfer some shares. This could be 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 no two are the same. Once you have started your own company, its name is unique to you. Please note that 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. This could be 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 draw all of it in the year you earn it. When you make a good income and draw it all, you may 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.
Better credibility with the outside world
Your business will be 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 generally due to the risk in the contracts 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 to who they offer contracts. Agencies will also not provide 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. You will do so from your post-tax personal income when you invest personally. 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 additional income without incurring higher tax rates.
The disadvantages when you are a limited company contractor or company owner in general
The disadvantages of running a limited company are:
- You will spend more time on administration. This will include when you do your bookkeeping. It will also include when you perform your filing duties. This will encompass the 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 to be kept 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 acted 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 now lies with the business providing the work when 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 of running a limited company
- Any one-off company set-up fees. There are also costs in the form of accountancy fees. When you file the Confirmation Statement each year, there is a £13 filing fee with Companies House.
- 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 think about closing your company, there is a particular process to follow.
You can delegate many of your duties and responsibilities to your accountant when you are a limited company contractor.
However, it does not harm to be more organised yourself:
- We recommend you set up your business tax account with HM Revenue & Customs.
- We also recommend that you run your own book-keeping system. Using an online system will make this task a lot easier.
- It is good to get your contractor finances in order -banking, accountant, insurance, income protection etc.
It is also good, from the outset, to know how you should maintain your business records. In addition, you should also be aware of how long you need to keep your business records.
We have detailed all the annual filing dates you may need to meet as a company director and 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. Notably, the more an individual earns, the more advantageous it is to run a company of their own.
However, as highlighted earlier, being a limited company contractor is not for everyone. 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, and 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