Working Through a Limited Company: Benefits and Challenges
Through a Limited Company: Benefits and Challenges
Whether you're a contractor, freelancer or sole trader, if you're looking to maximise your income and take control of your career, setting up a limited company could be exactly what you're looking for. With a whole range of financial and professional benefits, contracting through a limited company has quickly become the preferred route for many professionals in a contacting niche. However, this also comes with many responsibilities and challenges, and being aware of the downsides is a key part of making the right decision.
At
Go Limited, we understand the advantages and disadvantages of working through a limited company, and how it compares to the umbrella company approach. With our help, you can decide which route works best for your professional goals.
The Benefits of Setting Up Your Own Limited Company for Contracting
There are a number of benefits that come with setting up your own limited company for contracting, which is why it's something that a growing number of contractors are doing. From limited company wages to limited company tax benefits, it's easy to see why setting up a limited company has become the 'go to' option in the UK.
You Can Claim Tax Deductible Expenses for a Limited Company
One of the main benefits of setting up your own limited company for contracting is being able to claim allowable expenses. There's a wide range of tax deductible expenses for a limited company, which reduces your taxable profit. Allowable expenses for a limited company include costs such as equipment, travel, office supplies, business insurance and professional training. By deducting these from your limited company revenue, you lower your tax bill and keep more of your hard earned income in your pocket.
You Can Maximise Limited Company Wages Using Salary and Dividends
When you're contracting through a limited company, you have a lot of flexibility in regards to how you pay yourself. A lot of limited company contractors pay themselves a small salary - usually up to the tax-free personal allowance, ensuring National Insurance is still paid - and then take the rest of their income as dividends. As dividends are taxed at a lower rate than regular income, this allows you to reduce your overall tax liability and increase your limited company take-home pay.
Your Limited Company Take-Home Pay is Likely to Be Higher
When you're putting a lot of time, energy and hard work into building a business, you want that reflected in the money you earn. When you set up a limited company for contracting, you're likely to see more of that hard-earned money. Compared to workingunder an umbrella company or as a sole trader, contractors operating through a limited company usually have a rate of take-home pay. This is because you can pay yourself a combination of salary and dividends, which is a lot more tax efficiency. Plus, you have the ability to claim allowable expenses, which also reduces your outgoings.
You Have Greater Control Over Your Business and Career
Operating your own limited company can provide you with control over your work, your clients, and the growth of your business. Compared to being employed or even operating via an umbrella company, you will have the ability to negotiate your rates, select the clients you wish to work with, manage your brand, and even expand your services or hire subcontractors if you desire.
This level of freedom and flexibility is a significant draw for many professionals, as well as an opportunity for growth.
Your Personal Assets Are Safe and Protected
As a limited company is a separate legal entity from its owner, your personal finances are protected if the business runs into financial trouble. In the event of debt or legal action, your liability is limited to the value of your shares in the business, which stops your personal property, such as your home or savings, from being at risk.
You May Be Seen as Being More Professional by Clients
There's a lot of contractors out there, and clients have the freedom to choose who they work with, which is why you need to stand out. Many clients view limited companies as being more professional and established, compared to individuals operating under their own name, such as sole traders and freelancers. Having a limited company name, business bank account, and
being fully registered can help to boost your credibility and make you more appealing to clients.
The Downsides of Contracting Through a Limited Company
As you can see, there are a number of benefits of contracting through a limited company, but that doesn't mean there isn't a challenge or two.
You'll Have More Admin and Paperwork to Manage
One of the biggest downsides of contracting through a limited company is the amount of paperwork involved. You are responsible for managing your own accounts, filing annual tax returns, submitting VAT returns, running payroll, keeping accurate records and meeting HMRC deadlines. The admin side of running a limited company can be daunting, but many contractors hire a limited company accountant to help.
You're at Risk of Making Costly Errors (Unless You Have Expert Help)
Whether you're organising your limited company tax benefits or allowable expenses for a limited company, there's a chance of you making a mistake. Tax and accounting in the UK can be complex - especially with rules like IR35 - that affect how you are taxed. If you don't understand these rules or you make a mistake, you could face penalties, interest or even an HMRC investigation. Of course, you can reduce this risk by working with a limited company accountant.
You Have Additional Costs When You're Contracting Through a Limited Company
There's undeniable financial advantages to contracting through a limited company, but there are also a handful of additional costs you'll need to consider. These include accountancy fees, business insurance, bookkeeping software and any professional services that you need to keep on top of the paperwork side of things. These expenses are usually outweighed by the tax benefits of setting up a limited company, but they could eat into your profits slightly.
Limited Company Alternatives: Umbrella Company vs. Limited Company
If you're not ready to manage the responsibilities of setting up your own limited company, you might have considered contracting through an umbrella company. It's an approach that many contractors consider, as it appears to be a simpler alternative. With this approach to contracting, the umbrella company technically employs you, which means that they handle all of your tax and compliance obligations. This overcomes one of the main challenges of having a limited company, as the responsibility of tax is handed over to someone else. The umbrella company then pays you a salary after deducting taxes and fees, and you're paid via the PAYE system as you would if you were a full-time employee.
If you decide to contract through an umbrella company, you'll have very few administrative responsibilities, as the umbrella company handles tax, invoicing and payroll on your behalf. You are treated as an employee, so you don't need to worry about IR35. You're already taxed through PAYE and fall outside the scope of the legislation, giving you one less thing to worry about.
An umbrella company structure generally results in reduced take-home pay because all earnings go through PAYE taxation. When you work through an umbrella company
you can't access dividend payments or business expense claims
which limited company contractors receive. Your paycheck will have deductions from umbrella company fees. When working with an umbrella company you face limited financial control because you cannot adjust your payment method or income management.
Is Working Through a Limited Company a Better Choice?
For a lot of contractors, working through a limited company is a better choice. As a limited company contractor, you can retain a higher percentage of your earnings through the use of salary and dividends, and you can claim a wide range of allowable expenses. This reduces your taxable income and improves profitability, keeping more money in your business and pocket. You also have full control over how your business operates, including who you work with, what you charge, and what projects you take on.
Though you are responsible for all administrative tasks, including tax returns, accounts, payroll and statutory filings, limited company accounts are there to help. They will ensure compliance and avoid mistakes, giving you more time to focus on growing your business.
At
Go Limited, we've seen a lot of contractors make the leap from freelancing or being a sole trader to setting up their very own limited company, and few regret that choice. As a limited company contractor, you have the freedom to control the ins and outs of your business, including your income and expenses. For the majority of limited company contractors, the added paperwork and responsibility is a small price to pay for the financial benefits a limited company brings to the table.
FAQ: Working Through a Limited Company
1. What is a limited company?
A limited company is a type of business structure that is legally separate from its owners (shareholders) and directors. It has its own legal identity and is registered with Companies House in the UK.
2. What are the main benefits of working through a limited company?
Key benefits include: The business model delivers enhanced tax efficiency through dividends along with protection against personal liability, improved professional standing and superior management of both financial operations and key business choices.
3. What potential disadvantages exist when operating as a limited company?
Yes, a few potential challenges include:
1. More administrative responsibilities
2. Complex accounting and reporting requirements
3. Potential IR35 implications for contractors
4. Costs of accountancy and legal support
4. How does tax work in a limited company?
Limited companies payCorporation Tax on profits. Directors often pay themselves a mix of salary and dividends, which can be more tax-efficient than regular employment income. However, tax rules change frequently, so professional advice is recommended.
5. What is IR35 and why does it matter?
The IR35 tax legislation establishes guidelines to identify if a contractor should be considered self-employed or reclassified as an employee for taxation. A contractor caught by IR35 rules faces higher tax and National Insurance payments.
6. Do I need an accountant to run a limited company?
While it's not legally required, most people do hire an accountant. They can help with tax planning, filing returns, managing payroll, and ensuring you meet legal requirements.
7. Can I set up a limited company on my own?
Yes, you can register your company directly with Companies House. However, many choose to use an accountant or formation service to ensure it's done correctly.
8. Is it worth setting up a limited company if I'm a freelancer or contractor?
It depends on your earnings, clients, and how long you plan to trade. For many freelancers, a limited company can offer financial and professional benefits – but it also comes with more admin and responsibility.
9. What are my legal responsibilities as a director?
As a company director, you must:
1. Submit annual accounts and confirmation statements
2. Keep accurate financial records
3. Pay taxes on time
4. Act in the company's best interest
10. What if I decide to stop trading through my limited company?
You can close your company through a process called dissolution, or through a formal liquidation if debts are involved. An accountant or insolvency specialist can guide you based on your situation.
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.
