When I am running my own limited company and I have set this up, there are many things to consider from day to day. As a company owner you have certain director duties and your details will be available on the public record and there considerations here. Importantly, the main reason that many contractors choose to run their own company is first and foremost because it is more tax efficient. There are also many other pros, too, as well as some cons.
Have a read of my article covering tax tips for contractors for handy tips you should know when you have your own business. This is a member only article and you can read it if you sign up as a member. This includes my latest advice for best tax planning ideas.
I 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.
When might running my own company not be the best option?
Please note, it is not always the best option for you to be actually running a limited 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 my own 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 for a short period.
Therefore, you should consider all of this from the outset if you are thinking about setting up and running my own 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.
Company Taxes and my useful tax guides
When I am running my own limited company there are several company taxes to be aware of. I have written some extensive guides on company taxes which will help you understand how these taxes work:
It is a good idea to set up a business tax account with HM Revenue and Customs. You can then view your tax accounts online as well as your accountant.
Another useful read too 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 need to consider.
The main areas to consider when you are running your own company
There are a number of things to consider when you run your own company. These include but are not limited to:
- Your choice of company bank account
- Make sure you have adequate insurance in place. Professional Indemnity Insurance is a usual requirement for contractors
- Appoint a good 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)
- How to invoice your client -if you use an online accounting system (see the next point) you will in most cases be able to create your invoices when using this
- Choosing a book-keeping / accounting system
- 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
Considerations going forward
- Paying yourself a salary
- Employing staff to work for your company. You might consider paying your spouse a salary
- Paying 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 you standing the cost out of your own personal income that 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
- Consider starting a company pension scheme to save further company tax (see below)
- Your company’s filing requirements throughout the year. Your accountant will help guide you here however it is also good for you to keep track of what is due and when
The advantages when I am running my own limited company
The advantages of running my own limited company 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 costs that 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 is both financial and admin type duties, but you are the decision-maker for your business.
- You can be more tax-efficient (see my article on contractor tips referenced above) and plan 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 7.5% 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 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 info or large scale contracts, the client will request limited liability protection from contractors who they offer contracts to. Agencies will also not offer his 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. Which one is better for you is a question for your pensions advisor. However, paying from your company allows you to extract further income without incurring extra higher rates tax.
The disadvantages when I am running my own limited company
The disadvantages of running my own limited company are:
- You will spend more admin time and costs. Such as when you do your bookkeeping and 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 yours.
- 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.
- There are extra costs in the form of accountancy fees. There are also specific filing fees with Companies House 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.
If you are thinking of closing your company for any reason there is a particular process to follow.
When you are running your own UK company you can delegate a lot of responsibilities to your accountant.
However, it does no harm to be more organised yourself:
- I recommend that you set up your own business tax account with HM Revenue & Customs;
- I also recommend that you run your own book-keeping system. If you use an online system this will make this task a lot easier.
I have detailed all of the filing dates that you may need to meet as both a company director and someone who files a Self-Assessment Tax Return. It is a good idea to make diary notes of these in order for you to track when payments are due.
A final thought is that contracting does in the main suit the majority of contractors. To sum up, the more that an individual earns, the more advantageous it is to be running their own company.
However, contracting through your own company is not for everyone, though, as highlighted in the reasons above. Some agencies will also only offer contracts to contractors with their own company. When you provide services in this type of market, you may be more likely to secure a contract with your own company.
Finally, I 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 LinkedIn https://www.linkedin.com/groups/4660081/