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Introduction -running a limited company
When you run an IT contractor limited company in the UK contracting market or, are a small business owner in general, there are many things to consider from day to day. If you plan to become an IT contractor or a contractor in another industry, you should note too that when you start contract work, limited company status is usually the best option. What’s more we will look at the pros and cons later on. Therefore, when you have your own UK company, besides considering how to start as a contractor, you will have the task of running this too. In addition, you will need to complete all the daily tasks as a UK limited company contractor. You will also have official duties as a company director too.
When we investigate how to become a contractor, as part of contracting through your own company, you will need to search and organise your limited company contracting work. However, when you are working as a contractor (UK) you will also have specific director duties to adhere to too. Furthermore, some of your personal details will be available on the UK public record. Therefore, there are additional considerations here.
There are many benefits of setting up a limited company when contracting in the UK. We will cover these later in the article. However, before this, we will explain the process of how to run a UK company effectively and tax efficiently.
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. When starting out as a contractor, this is generally the main reason for all those who run their own IT contractor companies. However, some agencies and clients will only do business with IT contracting companies as opposed to sole traders.
There are many other pros, too, as well as some cons when we look at how to run a limited company. This guide on running a limited company is ideal for a first-time contractor. However, it is also useful for someone who has been a contractor limited company for a while as well as company owners in general.
What is a limited company contractor?
Can I be self-employed and a director of a limited company?
For the layman, some confusion can arise here. In a legal context, being self-employed is not the same as being a director of a UK contracting ltd company. Therefore, if you consider am I self-employed if I have a limited company the answer is no. If you are a company director you are running your own business, but you are not self-employed and the same applies vice versa.
When you go limited company contracting you will provide your services through your own UK company. As we consider how to work as a contractor (UK), you will supply your services through your contractor’s limited company. Notably, when you are getting set up contracting, your services will be based on your skills, and you will provide these to your client or customer.
Using your own limited company for contracting is different from working as a PAYE employee or through an umbrella company. First, when you are contracting through a limited company or are a company owner in general, you and your company are two separate legal entities. Therefore, when being a contractor in the UK, your customer will pay your company, rather than you. In turn, your company will pay you a salary and dividends if it so chooses.
If you are employed or work through an umbrella arrangement you will submit a timesheet each week or month and be paid based on your work. If you run a UK contractor limited company you will send an invoice to your client or in some cases, you may need to send a timesheet.
Running a limited company -admin tasks and responsibilities
Notably, when you are employed or work through an umbrella, submitting your timesheet is probably the only admin task that you will have. In comparison, when you have your own IT contractor company or company in another field, your business will need to adhere to filing requirements. These requisites for a contractor limited company come by way of annual accounts and a Confirmation Statement, as well as a company tax return. When your run your own contractor business, there is also additional VAT return filing if you are VAT registered, and PAYE filing if you run a PAYE scheme.
Therefore, when you are contracting through your own company there are extra responsibilities. However, there are many advantages to running a contractor ltd company the main one of which is your take-home pay, and we will cover these advantages later.
How to set up as a contractor (UK)
Setting up a ltd company for contracting
When you are setting up a limited company for contracting (UK) there is plenty to consider. Notably, our UK contracting guide goes into this in more detail when you are thinking of becoming a contractor (UK) in the UK. First, when setting up your own company for contracting, you will need a contract for your services. You may land the contract with a recruitment agency or via a client directly. Once you know you will be landing the contract, the next step when setting up as a contractor is to incorporate a new company. Therefore, when you look how to set up a limited company for contracting (UK), there are several ways you can organise this:
- Do it yourself.
- Let your accountant do this.
- Use a company formation service.
Many limited company contractors and small business owners will let their accountant handle the formation process. However, you can organise the UK contractor ltd company set up yourself if you are informed in advance of what is required.
Running a limited company -initial tasks once your company is set up
Once your contracting limited company is in place some other basic tasks for you to complete are as follows:
- Appoint an accountant if you have not already done so. UK contractors tend to use a specialist contractor accountant as they are knowledgeable within the UK contracting.
- You will need to set up a company bank account.
- You will need to take out the required insurance cover for your new business.
- Choose a bookkeeping-type package for your business. your decision here will be based on whether your business will be VAT registered or not s there are extra considerations in terms of VAT reporting. Using an online system will make this task a lot easier.
- We recommend you set up your business tax account with HM Revenue & Customs.
You can delegate many of your duties and responsibilities to your accountant when you are limited company contracting. However, when you are a ltd company contractor, it does not harm to be more organised yourself. As a contractor and new business owner, it is good to get your contractor finances in order -banking, accountant, insurance, income protection etc from the outset.
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.
Limited company contractor guides
UK contracting guide
We also have a first-time contractor’s guide to limited company contracting in the UK. This gives a complete overview of what to consider when you start as a contractor or a consultant operating independently with your contracting UK limited company. Much of the information will also apply to many other business owners working for themselves for the first time.
Tax tips for UK contractors
Besides this guide on how to run a limited company, please read our article covering tax tips for limited company contractors. This contains many handy tips and advice that you should know when you have your own contractor company or small business. The article includes our latest guidance for the best tax planning ideas when you are limited company contracting.
Running a limited company -contractor taxes and other helpful tax guides
If you start your own business and are working as a contractor through a limited company, 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 while limited company contracting in the future.
We have written some extensive guides on UK contractor taxes which will help you understand how these taxes work:
Ltd company vs PAYE -when might a contractor limited company not be the best option?
Is being a contractor worth it? Basically, the setting up limited company for contracting process is not always the best option to go through in some circumstances. If you are planning on working as a contractor through a limited company you should check this with your accountant. When it is not the best option, you may opt for an umbrella scheme type set-up. As an alternative to limited company contracting, you could instead work on a self-employed basis. There are three main reasons you may find that going ltd company contracting is not worth it:
- You may be on a lower income, perhaps £25,000 or less per year.
- The 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 contractor 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.
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 run 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).
- Your choice of a business bank account.
- Make sure you have adequate insurance in place. Professional Indemnity Insurance is a usual requirement for contractors.
- 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 I run my 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 limited company contractors compared to the VAT flat rate scheme.
- Learn how to invoice your client. If you use an online accounting system (see the next point), in most instances, you can create your invoices within the online system.
- 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
- As a limited company director, pay yourself a salary.
- Employing staff to work for your company. You might also consider paying your spouse a salary if they will be working for you.
- Learn how to pay yourself dividends. The payment of these is based on what your company shareholding is set up as.
- Consider starting a company pension scheme to save further company tax (see below).
- 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.
- File your company tax return.
- When to pay your contractor Corporation Tax.
- File 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 contractor business expenses to help reduce your contractor limited 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 incurred by your contractor company will include things like:
- Travel costs.
- Mileage allowances for your private car.
- Office costs, including use of home as an office.
- Broadband fees.
- Accountants’ fees.
- The costs for your own business website.
- Business clothing(where this meets specific criteria).
- and many more.
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. What’s more, for any actual business costs which you pay yourself, you can assign them to your company and claim them back as business expenses. If you can claim a cost as a business expense, your company will save Corporation Tax. Currently, the rate of this is 19% up to 31 March 2023, however from 1 April 2023 this rate increases. Companies with profits under £50K will pay tax at 19% while companies with profits over £250K will pay 25%. Companies with profits between £50K and £250K will pay tax at the main rate reduced by a marginal relief, providing a gradual increase in the effective Corporation Tax rate.
- 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. In addition, you can also plan your company’s and your own finances better. The company Corporation Tax rate is currently 19% if your profits are under £50K or at a higher tax rate if your profits are over this, as explained above. 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. Indeed, company names are unique, and no two are the same. Therefore, once you have started your own company, its name is unique to you. However, this is not the case for those that are self-employed.
- There will be 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.
UK contracting does, in the main, suit the majority of contractors and we explain in detail here how to run a limited company. Notably, the more an individual earns, the more advantageous it is to run a company of their own. If you do go contracting, running a limited company leaves you with plenty to think about, as highlighted in this guide.
However, as highlighted earlier, running a contractor limited company 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 UK 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
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