Running a limited company

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Introduction 

This is our official guide to running a limited company as a UK contracting professional in 2024. What should you consider when running your own contractor limited company or small business? When we think about how to run a limited company, there are many things to think about from day to day. If you’re new to contracting and plan to become an IT contractor (UK) or a contractor in another industry, you should be aware when you start contract work, limited company contracting status is usually the best option. Therefore, this guide will research running a UK business as a limited company contractor.

This guide contains lots of good company advice when running your own business. Indeed, we’ll look at the pros and cons of a UK IT contractor running a company to provide their IT contractor services later in this guide. You may be looking at how to start as a contractor and operate in the UK contracting market. Our guide will go into more detail regarding setting up a contractor business later.

As a UK limited company contractor in the contracting industry, you must complete all your daily tasks. These tasks as a company director are related to your Ltd contract role. However, when you’re an independent contractor (UK) contracting as a limited company, you’re in complete control of how you pay yourself. This isn’t the case when you’re employed or work through an umbrella company, and the extra tasks are minimal.

Initial thoughts

First thoughts 

Setting up a limited company when contracting in the UK has many benefits. What’s more, when setting up as an independent contractor, there’s plenty to learn about running a limited company. However, in some instances, you may ask if contracting is worth it (UK), and this will depend on your circumstances. Later, we’ll explain the pros and cons of being a contractor vs employee (UK) or umbrella company worker (UK). However, before this, we’ll explain the processes of:

  • How to set up a limited company for contracting. Here, we’ll look at the contractor process in terms of company setup.
  • How to run a company smoothly and effectively. When we consider how to run an IT company or a Limited company, there are many areas to cover. However, you should know your director’s duties and comply with the UK authorities. In addition, you should have a sound accounting system and keep up with your business record keeping.
  • What to consider when you run your own business as a limited company contractor. What’s more, we’ll cover how you can be tax-efficient when you pay yourself.

Further initial thoughts

Some people ask if I can be a contractor for my own company, and the answer is yes. You can work this way if you can land a contract for your services through a contracting company. Many contractors in the UK work in IT and use their own IT contractor limited company. There’s one main reason you may go through the process of setting up your own company as a contractor, which is the alternative to operating as a contractor sole trader. To clarify, the main reason for contracting through your own company is because it’s more tax-efficient. Indeed, when starting as a contractor, it’s generally why all those running their own IT contractor companies choose to work this way. Also, some agencies and clients only work with IT contracting companies rather than those with those contracting as sole traders.

There are many pros and 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’s valuable for someone who has been a contractor limited company for a while. In addition, this guide is suitable for UK company owners in general. HMRC has a further applicable A to Z guide on running a UK limited company.

Initial thoughts on how to become a contractor (UK)

Let’s investigate how to become a contractor as part of contracting through your own company. First, you should search and organise your limited company contracting work. Basically, if you work in IT, you’ll be looking for IT contractor work in the IT contract market. This involves looking for contractor jobs (UK) on the various job boards. You can also visit recruiter websites to source your first limited company contract. Indeed, many who want to be IT contractors (UK) or contract in other industries will consider:

  • How to become a software contractor (UK).
  • What should I do to become a UK contractor?
  • How to become an IT contractor (UK).
  • How to become a contractor in financial services.
  • What to do to become a contractor in other industries.

However, you’re a company director working as a contractor (UK). Therefore, you’ll have specific director duties to adhere to. Furthermore, some of your personal details are available on the UK public record. Hence, there are further considerations as part of being a UK director.

Common questions

Before starting up to be your own contractor for the first time, you’ll likely have many questions. These include being a contractor in a company and what to expect. They may be about how a limited company works in the UK. Therefore, such questions from those who are looking to be a contractor consultant with their own company include:

  • How does contracting work in the UK?
  • Is it worth being a contractor (UK)?
  • How do I become a contractor?
  • What do you need to become a contractor?
  • Can I be a contractor without a company?
  • Can you be a contractor to your own company?
  • Do I need to incorporate as an independent contractor?
  • How to set up a limited company for contracting.
  • What does it mean to work as a contractor?
  • How to become a private contractor.
  • How to get contracts as a contractor.
  • How to run a contracting business.
  • Can I pay myself as a contractor from my own company?
  • How to keep track of taxes as a contractor.
  • How can I run my company tax efficiently?

Another key thought is how to pay less tax as a limited company & how to save tax as a contractor. On this contractor’s website, we’ve many guides covering both areas in more detail. Therefore, please feel free to browse the blog if you’re looking for a particular subject.

What is a limited company contractor? 

Can I be self-employed and a director of a limited company?

For laymen, slight confusion can arise as some consider themselves a `self-employed limited company’. In addition, some other people will ask, `is a director of a limited company self-employed?’ In a legal context, being self-employed isn’t the same as being a UK contracting Ltd company director. Therefore, the answer is no if you consider whether I am self-employed if I have a limited company. Consequently, you’re not self-employed if you’re a company director running a contracting business.

In general

When you enter limited company contracting, you’ll provide your services through your UK contractor service company. As we consider how to work as a contractor (UK), you’ll supply your services through your contractor’s limited company. Therefore, when you’re getting set up contracting, your services will be based on your skills. In addition, you’ll provide these skills to your client or customer.

Using your own limited company for contracting differs from working as a PAYE employee and working through an umbrella company. When contracting through a limited company or a company owner, you and your company are separate legal entities. Therefore, when you’re an incorporated contractor in the UK, your customer will pay your company rather than you personally. In turn, your company will pay you a salary and dividends if it so chooses.

You’ll submit a timesheet weekly or monthly if you’re employed or work through an umbrella arrangement. Once it’s processed, your employer will pay you based on your work. On the other hand, you’ll invoice your client if you run a UK contractor limited company. However, you may still have to send a timesheet in some cases.

How do I set up as a contractor (UK)? 

Setting up a Ltd company for contracting

When considering setting up a limited company (UK) for contracting, choices regarding contractor company formation are available. Furthermore, there’s plenty to consider when setting up a limited company for contracting in the UK. If you’re considering becoming a contractor (UK) and want to know how to set up your own company, our UK contracting guide goes into the contractor setup process in more detail.

First, when setting up your own company for contracting, you’ll obtain a contract for your services. You may land the contract with a recruitment agency or directly with a client. Once you know you’ll land the contract, you can set up a limited company as a contractor. Therefore, you must incorporate a new UK company once you begin setting up as a contractor (UK). In addition, when you’re a new contractor setting up a limited company, you should consider contractor company names and choose the best one for your new business. What’s more, when you look at 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 (UK) and small business owners let their accountants handle the formation process. However, you can organise the UK contractor Ltd company set up yourself if you know in advance what’s required.

Running a limited company & what are the admin tasks & responsibilities?

Submitting your timesheet is probably your only administrative task when employed or working under an umbrella. In comparison, your business must maintain accounting records or books when you have an IT contractor company or company in another field. Therefore, when you run your own business as a limited UK company, you should keep an adequate accounts record of all business transactions. Also, you should adhere to any annual filing requirements. Basically, the main filing requirements for a contractor limited company come from accounts, a company tax return, and a confirmation statement annually.

When working through a limited company and running your own contractor business, there’s additional VAT return filing if you’re VAT registered and PAYE filing if you run a PAYE scheme. Indeed, these are all part of the official responsibilities when you have a limited company in the UK.

Therefore, when contracting through your own company, there are extra responsibilities. However, there are many advantages to running a contractor Ltd company, the main one being your limited company take-home pay, and we’ll cover these advantages later.

Running a limited company & what are the initial tasks after company setup?

Once you’ve set up a limited company for contracting, there are some additional tasks to take care of. Therefore, once your contracting limited company is in place, these extra basic tasks to complete as part of owning a contracting company are:

  • When starting a contracting company, you should appoint an accountant if you’ve not already done so. Most UK contractors tend to use accountants for limited company contractors. Moreover, these are specialist contractor accountants as they’re knowledgeable within the UK contracting
  • As you’re starting a contractor business, you must set up a company bank account.
  • When you become an independent contractor, you should take out the required contractor business insurance cover for your new business. A benefit of using this website is that when you start a business as a contractor or have been contracting for a while, you can get a contractor discount on your insurance. Please visit the insurance link above to find out more.
  • Choose a bookkeeping-type package for your business. When starting a contracting business, your decision will be based on whether your business will be VAT-registered or not. This is because there are extra considerations in terms of VAT reporting. Using an online system will make this task a lot easier.
  • We recommend setting up your business tax account with HM Revenue & Customs when you start working as a contractor in the UK.

Delegate tasks & other thoughts

You can delegate many of your duties and responsibilities to your accountant when you’re limited company contracting. However, when you’re a Ltd company contractor, it doesn’t harm to be more organised when you’ve your own contracting company. Indeed, as a contractor & director of your new business, it’s good to get your contractor business management and, in addition, your contractor finances in order -banking, accountant, insurance, income protection, etc from the outset.

Knowing how to maintain your business records is good from the outset. In addition, you should be aware of how long you must keep your business records.

We’ve detailed all the annual filing dates you may have to meet as a company director and someone who files a Self-Assessment Tax Return. It’s 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 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 applies 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 guide covering tax tips for limited company contractors. This contains many handy tips and advice you should know when you’ve your own independent contractor company or small business. The guide includes our latest guidance for the best tax planning ideas when you’re limited company contracting. 

Running a limited company -contractor taxes & 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 you should be aware of. This will include VAT registration and considering whether you’re better off under the Flat Rate VAT or the standard VAT scheme. When you’re a contractor working through your own company, it’ll 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’ve written some extensive guides on UK contractor taxes which help you understand how these taxes work:

More considerations 

Ltd company vs PAYE -when is a contractor limited company not the best option? 

Is being a contractor worth it? Setting up a limited company for contracting isn’t always the best option in some circumstances. If you plan to work as a contractor through a limited company, you should check this with your accountant. You may opt for an umbrella scheme type set-up when it isn’t the best option. Alternatively, to limited company contracting, you could instead work as self-employed. There are three main reasons you may find going Ltd company contracting isn’t 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 temporarily.

Therefore, please consider this if you plan to set up a contractor limited company. Getting your set up right from the start is key so you can work efficiently.

HMRC Business Tax account & other areas

The tax requirements for contractors during a calendar year will include Corporation Tax, VAT (if you’re VAT registered) and PAYE/NIC (if you run a PAYE scheme to pay salaries). When you own a Ltd company, setting up a Business Tax account with HM Revenue and Customs is a good idea. You can then keep an eye on your contractor taxation by having the ability to view your tax accounts with HMRC online. In addition, your accountant can view this once they’re added as an agent for each tax service.

Another good guide on this contractor 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 can’t pay its taxes, there are certain things you must consider. 

What are the main areas to consider when you’ve your own contractor company? 

Initial considerations

There are several things to consider when you’re running your own business. Indeed, when you set up a company for the first time, these include: 

  • Setting up your company. You can do this yourself, ask your accountant, or use a formation agent. As part of this, you should choose a registered office, who the director(s) are, who the shareholder(s) are, your SIC code (trading activity) and whether you’d like a company secretary (nowadays, most small companies don’t have one as it’s 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’re a contractor, it would be wise to find a specialist contractor accountant to look after you from the outset.

What are further initial considerations when I run my own company? 

Some further thoughts will include:

  • Consider whether you should 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 limited company contractors compared to the VAT flat rate scheme.
  • Learn how to invoice your client ready for when you’re getting paid as a contractor. 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. When you’re a contractor, you can use contractor software (UK) for your accounting. This makes your company’s record-keeping more accessible and saves time.
  • Consider how you’ll 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 -what are your future considerations?

Some further considerations when you’re running a limited company include: 

  • Learn how to pay yourself dividends. Please note that dividend payments are based on your company’s shareholding. In addition, you can look at how to pay yourself tax-efficiently when you run your own business.
  • Consider starting a contractor limited company pension scheme to save further company tax (see below).
  • Learn about your company’s annual filing requirements throughout the year. Your limited company contractor accountant will help guide you here concerning the following:
  1. Filing your accounts at Companies House.
  1. File your company tax return.
  1. When to pay your contractor Corporation Tax.
  1. File your company’s Confirmation Statement with Companies House.

However, it’s a good idea to keep track of what is due and when, too.

Claim your contractor expenses

Please claim all contractor business expenses to help reduce your contractor limited company tax. As a business contractor with your own company, there’s a second consideration if you claim for any business expenses you’ve paid personally. Indeed, your company can reimburse you for these, rather than you standing the cost out of your income (which has already been subject to tax).

Business contracting expenses which you’ll incur via your independent contractor company include things like:

  • Travel costs. 
  • Broadband fees.
  • Accountants’ fees.
  • Software.
  • and many more.

IR35 / off-payroll rules

If you’re contracting with your own company, it’s best to be working outside the IR35 rules. When you’re outside IR35, two other questions in respect of limited company advice which pop up from contractors in terms of how to pay yourself from a limited company (UK) are:

  • What director’s fees do you recommend as a sole director if I am outside IR35?
  • What director’s fees do you recommend as a director with additional employees if I am outside IR35?

In both cases, you could pay yourself tax efficiently or take your company’s post-tax profits as a mixture of salary and dividends. If you prefer the latter, please read this guide on how much dividend I can take.

Another question from an established contractor with their own company is:

Can I keep my limited company open while working via an umbrella solution?

The answer is yes. However, if the umbrella work continues for several months, you should ask your accountant if they can reduce your accountancy fees. If the umbrella work continues beyond a year, it might be time to consider closing your company.

What are the advantages for a contractor limited company owner?

Let’s now look at the advantages of being a limited company contractor or a company owner. These advantages of contractor vs employee (UK) or umbrella company worker (UK) are: 

Main advantages 

  • When you run a Ltd company, you’ll have a higher personal income. Due to the ability to take your income as a mix of salary and dividend, as a Ltd contractor, you’ll pay less income tax than someone employed or self-employed. Therefore, when you own a limited company, based on your contract rate, this could be hundreds or thousands of pounds of extra income every year.
  • If you work as an IT contractor via your own IT contracting company, you’ll have professional status. Your company’s standing will increase once you start as a contractor, and your clients may hold your business in high regard. A change in perception stems mainly from the fact the business world watches companies more closely. To clarify, UK directors with their own contracting companies (UK) have more legal duties and reporting requirements with which they must comply. Moreover, the business world and the public can view their accounts and corporate details on the public register.

Secondary advantages 

  • 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 for your single-person limited company in the future, your private assets are secure. This is because a company is a separate legal entity. That’s unless you have personally guaranteed a bank loan. There are also other exceptions when a director is guilty of wrongdoing.
  • You can claim a broader range of expenses as a limited company. Indeed, it’s one of the benefits of being a contractor with your own company. What’s more, for any actual business costs 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. This rate was 19% up to 31 March 2023; however, from 1 April 2023, this rate increased. Companies with profits under £50K pay tax at 19%, while companies with profits over £250K pay 25%. Companies with profits between £50K and £250K pay tax at the main rate reduced by a marginal relief, providing a gradual increase in the effective Corporation Tax rate.

Further advantages 

  • When you have a contracting company, you’re in complete control of your business affairs. Indeed, when you’re Ltd contracting, this includes financial and administration-type duties, and you’re the decision-maker for your business.
  • You can be more tax-efficient through your own contractor’s business. Please see our guide on contractor tips referenced above. In addition, you can 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 can 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.

More advantages

  • When you’ve your own UK contracting limited company, you have the protection of your company name. Indeed, UK company names are unique, and no two are the same. Therefore, once you’ve started your own contracting company, its name is unique to you. However, this isn’t the case for those who are self-employed.  
  • There is the option to defer some of your income. When you operate through a contracting company, you’ll decide what salary and dividends to pay and when you’d like to pay these. If you defer some of your income, you might draw this later. This could be when perhaps you’ve 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’ll pay higher tax rates on the amount which falls in the higher rates tax band. When you’ve your own contracting company, you can plan around this.

Better credibility in the outside world

Your business is more credible to the outside world. Having your own contracting company with a corporate image will make your business more credible. Certain recruitment agencies in the finance and IT industries 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 whom they offer contracts. Agencies won’t usually provide this type of work to the self-employed. Therefore, a company can improve its competitive edge. 

Pension scheme 

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 personally. You’ll do so from your post-tax personal income when you invest personally. You can discuss this with your pension adviser, who can inform you which is better. However, paying from your company allows you to extract additional income without incurring higher tax rates. The current limit is £60,000 per annum in 2024/25. 

What are the disadvantages of a limited company contractor?

There are disadvantages to running a limited company in the UK, too. These are when we compare it with contractor self-employed vs limited company or PAYE vs contractor. The points below are advantages when you don’t run your own limited company and work as self-employed or are employed. 

Main disadvantages 

  • You’re in charge of your company’s affairs. This will involve meeting the various deadlines and due dates each year. The company’s statutory records should be kept up to date. Even if your contractor accountant looks after these for you, the actual duties are your responsibility.
  • If you provide your contract services via your own contracting company, the IR35 legislation could apply to relevant work assignments. Indeed, this could be the case if you haven’t acted to comply with these rules. The financial costs when you’re 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 it’s a `medium’ or `large’ business. If the business providing the work is a `small’ business, the responsibility still lies with the contractor. 

More disadvantages of running a limited company 

  • Any one-off company set-up fees. There are costs in the form of accountancy fees, too. When you file the Confirmation Statement each year, there’s a £13 filing fee with Companies House.
  • It isn’t 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’s a certain process to follow. 

Final thoughts 

UK contracting does, in the main, suit most contractors. In this guide, we explain in detail how to run a limited company and what to think about when you’ve your own independent contractor company. Indeed, some good company advice is 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 we showed earlier, running a contractor limited company isn’t for everyone. Some agencies only offer contracts to contractors with their own company. When you provide services in the type of markets 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 a contracting company.

Finally, we explain here what to consider if you’re considering moving from an umbrella company to your own company.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: April 6th, 2024 / Categories: First timer guide, Main Guides, Running Your Own Company /

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