Traditionally, contractors have mostly run their finances through their own limited companies and though this has changed a bit in recent years with the arrival of umbrella companies and the potential problems of the IR35 legislation there are still a great many contractors out there who prefer to run their business in this way. After all, the whole point of striking out on your own as a contractor is being your own boss and running your own company, with you as a director working your contracts through your company, right?
Limited companies have been especially popular with those contractors who earn in excess of £200 per day as the limited company route has traditionally been seen as the lower tax route. However, in recent years the potential of being ensnared by IR35 and being accused of false employment has given even high-earning contractors a reason to think carefully before setting up their own company.
What Does Limited Company Contracting Offer?
The main thing that attracts contractors to limited company contracting is the potential for higher rates of pay doing the jobs they choose to do. Going it alone as a contractor means you will have to forgo the usual perks of regular employees such as holiday pay or sick pay, but in return limited company contractors can claim higher rewards. Additionally, contractors get to be their own boss and answer to no one, setting their own hours and choosing their working days. And the main thing that limited companies offer is the ability to claim a much broader range of expenses and a number of different options for tax planning.
The Tax Benefits of Limited Companies for Contractors
- Being paid through dividends, which will not be subject to the usual National Insurance rates.
- Being able to claim tax-free business expenses such as hardware, software, accountancy and legal expenses as well as travel and subsistence.
- Getting to sign up to the flat rate VAT scheme – this allows your company to charge VAT at 20%, whilst at the same time repaying HMRC at rates as low as 14.5%. The rate you are charged will depend on the industry that you contract in.
What Else Do I Need To Know?
If you are thinking about setting up a limited company then you will need to first talk to an accountant who specialises in contracting. They will be able to check whether limited company contracting is right for you and to make sure you would not be classed as a ‘disguised employee’ and fall under the IR35 legislation, making the perks of a limited company invalid. They will also chat with you about whether you would be better off under a limited company arrangement or working through an umbrella company.
How Do I Go About Setting Up a Limited Company?
If you do decide to go ahead the process of actually forming your own limited company is very simple. You will need to set up a business bank account because your company will be a separate legal entity to kept apart from your own personal financial dealings. You will need to register the company name with Companies House, which can be done quickly and easily online. And, as mentioned above, you will need to hire a contractor accountant to advise you on IR35 issues and help you with tax planning, end-of-year accounts, VAT returns and P60, P35 and P11D forms. You’ll also need to look into contractor insurance, including professional indemnity insurance and public liability insurance.