Financial Benefits of Limited Company Setup for Contractors
Financial Benefits of Limited Company Setup for Contractors - Why Choose this Option
If you've spoken to other contractors, or if you've spent any time online looking into contracting, you'll know that a lot of people eventually set up their own limited companies. This isn't a coincidence, it's a conscious choice that people make. There's a number of reasons for this, but for a lot of contractors, this choice is determined by profitability, higher take-home pay and financial success.
At
Go Limited, we know that setting up a limited company can seem complex, but you can't let that hold you back from reaping the financial rewards. That's why our experts are stepping in to help.
How Setting Up a Limited Company Could Boost Your Finances
As a contractor, you have the option to set up a limited company, and it's something that a lot of professionals choose to do. When you see how setting up a limited company could boost your finances, you'll understand why it's such a popular route. Not only does setting up a limited company give you full control over your business, it also gives you a number of financial advantages that you're unable to access if you choose to contract under an umbrella company.
By setting up a limited company, you immediately have a lot more control over your income, allowing you to optimise your tax planning and increase your take-home pay. Instead of receiving all of your income through PAYE - in the same way you would as an employer, employed by one business - you can pay yourself a combination salary and dividends. This can be tax-efficient, leaving you with a smaller tax bill and more money in your pocket.
Take Advantage of Allowable Expenses for a Limited Company
If you've done any research into the
financial benefits of setting up a limited company for contracting, you'll know that one of the major advantages is the ability to deduct allowable expenses. Allowable expenses for a limited company are costs you incur as part of running your day-to-day business, and they're deducted before calculating your taxable profit.
Tax deductible expenses include things like travel costs, office supplies, equipment and accountancy fees. By claiming limited company expenses, you can reduce your overall tax liability. There's a whole host of allowable expenses for a limited company contractor to claim - ranging from mileage and working from home costs - so regardless of industry or the services that you provide, you're likely to find allowable expenses related to your business.
Umbrella Company vs. Limited Company: Take-Home Pay Differences
When we're looking at the financial benefits of limited company setup for contractors, we need to compare things to working with an umbrella company. Though umbrella companies simplify your tax and finances by handling payroll, they also offer fewer tax-saving opportunities. With umbrella companies, you're treated as an employee, meaning your income and tax liabilities are out of your hands. But, as a limited company contractor, you can strategically pay yourself through a combination of salary and dividends. As dividends are taxed at a lower rate, you have less tax to pay.
The Other Limited Company Financial Benefits All Contractors Need to Know
- You Can Retain Profits for Future Investment - Unlike sole traders and umbrella company contractors who end up paying a lot of tax, limited company contractors can retain more of their profits within the business. This allows you to save for future investments, business expansions or even to cover the cost of periods of downtime, without incurring immediate tax liabilities.
- You Could Secure Access to Loans and Credit - Limited companies can often secure business loans and credit more easily than sole traders, as they're seen as being professional, reliable and in it for the long haul. You can use the limited company's established credit history, separate from your own, to enhance your borrowing potential.
- Your Assets are Protected - As a limited company contractor, you have limited liability protection. This keeps your personal assets safe from business-related financial risks, such as being unable to repay a loan. This protection offers contractors peace of mind and financial security. You can relax, knowing that your savings, property and other assets are safe.
- Branding and Professional Image - Operating as a limited company can enhance credibility with clients, as you're more likely to be seen as a professional, credible and reliable business, not least from a brand perspective. This can lead to higher-value contracts, improved client relationships and greater financial opportunities. This is especially important if you work with large businesses, many of which prefer to work with limited companies, rather than sole traders or freelancers.
Prioritise Limited Company Tax Planning
It doesn't matter what industry you're working in, limited company tax planning is key, particularly if you want to make the most of the financial benefits you can access. Working with an accountant who's experienced in limited company contracting can help you to find tax strategies that will minimise your tax liability. For example, timing your dividend payments, reducing your salary without reducing your tax-home pay, making use of pension contributions, and properly categorising business expenses.
Of course, there are additional responsibilities that come with being a limited company contractor, such as paying attention to changes in tax legislation. Staying up to date, informed and aware of any government policy changes and adjusting your tax planning strategy accordingly can prevent unexpected tax bills and ensure continuing compliance. By prioritising limited company tax planning, you can significantly enhance your financial outcome, and this is something that an expert accountant can help you with.
Umbrella Company vs. Limited Company: Which is the More Financially Smart Move?
When the time comes to how you want to approach contracting, you need to decide between working with an umbrella company or starting your own limited company. There are pros and cons of each, but the financial benefits of limited company contracting tend to outweigh the fewer administrative responsibilities that come with working under an umbrella company.
Though umbrella companies provide simplicity, limited companies offer greater financial rewards, as long as you are prepared to handle the additional paperwork.
For most contractors, setting up a limited company is usually the more financially smart option. Though there is more documentation to think about, a lot of contractors enlist the help of expert accountants, rather than handling it alone. By outsourcing tasks such as bookkeeping, annual accounts preparation and tax returns, you can focus on your contracting and building a strong, successful business, knowing that you're enjoying the financial benefits of limited company status.
Hard Work Pays Off: Limited Companies and Business Growth
There's no denying the link between business growth and financial stability, and that's certainly the case when you're running a limited company. Though umbrella companies offer simplicity and convenience by handling all payroll-related tasks for you, this tends to come at the expense of long-term financial growth. Limited companies require a bit more effort in terms of administration and compliance, but most contractors find that the benefits are well worth the effort.
Running your own limited company allows you to build your business as an asset, something for you to be proud of. You can reinvest profits, expand your services, and scale your operation to generate even higher revenue. Unlike an umbrella company arrangement, where you are essentially an employee with limited control, a limited company gives you the opportunity to grow and develop your business in line with your own vision. The financial rewards of operating as a limited company quickly pay off, far outweighing the administrative effort involved. By taking control of your finances and business operations, you position yourself for greater success and profitability, ensuring success on a long-term basis.
Is Setting Up a Limited Company for Contracting in the UK the Right Choice for You?
When the time comes to decide if you're going to set up a limited company for contracting, think about your income, the type of contracts you work on, and how willing you are to handle the admin side of things. Or, if you don't want the burden of paperwork, how willing you are to hire an accountant to do so on your behalf. For contractors looking to maximise their income and gain more control over their finances, setting up a limited company is often the best choice.
Though the setup process may involve more paperwork and ongoing administration, the financial benefits make it worthwhile for most professionals, and
Go Limited are on hand to help you along the way. If you are committed to contracting long-term and are planning to grow your business, a limited company structure is likely to be the most financially smart move for you.
FAQ - Financial Benefits of Limited Company Setup for Contractors
1. Contractors who establish a limited company gain several financial advantages.
The key advantages include:
- The combination of salary and dividends as payment methods results in lower tax compared to PAYE income.
- Your business expenses qualify for broader deductions against your income.
- You can maintain surplus profit within the company and then recover it later through a tax-efficient process.
- Your company can fund your pension while receiving tax relief from the government.
2. What financial benefits are gained through dividend income instead of a salary?
Dividends benefit from lower tax rates than income tax and avoid National Insurance Contributions (NICs). Choosing to receive remuneration through dividends instead of salary payments or umbrella company arrangements offers significant financial savings.
3. A limited company structure allows directors to claim broader business expense categories than what is possible through an umbrella company setup?
Yes. Directors of limited companies have the advantage of claiming a wider variety of business expenses.
1. Home office costs
2. Business travel and accommodation
3. Equipment and software
4. Accountancy fees
Under umbrella employment, expense claims are limited and heavily restricted by legislation introduced in 2016.
4. What tax savings could I realistically expect?
Your potential savings will vary depending on your level of income and your pay structure choices. Contractors who operate outside of IR35 save thousands of pounds annually versus those who use umbrella employment models. A contractor who earns over £75,000 annually often gains a take-home pay increase of 10–20% by operating through a limited company.
5. Is limited company setup the most advantageous option for all contractors?
Not necessarily. For contractors whose contracts fall within IR35 regulations a limited company structure tends to offer lower tax benefits compared to working under an umbrella company. Contractors who work on short-term projects or make less than £30,000 annually might find that the administrative expenses and costs exceed the financial advantages.
6. What impact does being inside IR35 have on my financial gains from a limited company setup?
Being inside IR35 limits your access to tax benefits from dividend payments and tax-efficient withdrawals. The tax treatment you receive through a limited company will resemble that of an employee which lessens the financial incentives of operating through a limited company.
7. Can limited company make contributions towards your pension scheme?
A substantial financial advantage exists through this arrangement. Your company's payments to your pension fund qualify as tax-deductible business expenditures and avoid National Insurance Contributions. You can save for retirement while lowering Corporation Tax through this approach.
8. Am I legally required to hire an accountant for running a limited company?
Although it is not mandatory by law, professional accounting assistance comes highly recommended. An experienced accountant can help:
1. Ensure compliance with Companies House and HMRC
2. File annual returns and VAT (if applicable)
3. Maximise allowable expenses and minimise tax liability
A competent accountant can easily prove their worth through the financial savings they help you access.
9. How does Flat VAT Scheme work for contractors?
The Flat Rate VAT Scheme enables small businesses to manage VAT more easily. This system requires you to pay HMRC a fixed percentage of your turnover instead of tracking VAT for each separate expense. The Flat Rate VAT Scheme can generate modest profit margins for low-expense businesses although important rule alterations occurred in 2017. The introduction of "limited cost trader" classification has reduced the benefits of the Flat Rate VAT Scheme for many businesses.
10. Is it possible to receive a salary from my limited company?
Yes. The majority of contractors receive modest salaries to remain under personal allowance limits for NIC credits then make up their earnings through dividend payments.
Important:
Please note: Any rates and thresholds mentioned in this article are correct at the time of publishing and may be subject to change.
When choosing an accountant, look for one with proven experience and expertise in the contracting sector, particularly around areas like IR35, limited company tax matters and off-payroll working. Formal qualifications are important, but relevant hands-on knowledge matters just as much — especially in a complex and fast-changing landscape like this.
