Go Limited - Financial Benefits of Limited Company Setup for Contractors
Go Limited - Financial Benefits of Limited Company Setup for Contractors
Regardless of industry, sector or the specific services that you provide, the freedom and flexibility that comes with being a contractor are unmatched. You’re the boss, the person who decides who you work with, when you work and how you work. There’s no one to answer to, and no one dictating the direction that your career goes in. But, contracting doesn’t look the same for everyone.
Don’t make the mistake of assuming there’s only one way to approach contracting, as that’s not the case. But, for many contractors, it eventually becomes time to transition from being a sole trader to a limited company contractor. At Go Limited, we know that can sound daunting, but we also know the financial benefits make it worthwhile.
How Does a Limited Company Work for Contracting?
When you’re a contractor, you have the option to set up a limited company for contracting. By doing so, your business enters into contracts, issues and receives invoices, and is responsible for its own liabilities, rather than you as an individual sole trader.
As a contractor behind the limited company, you act as both the director and shareholder. This means you’re responsible for managing the day-to-day running of the business and ensuring the business meets its legal obligations - for example, filing accounts and paying taxes on time - but it also means that you’re entitled to receive dividends from the business’ profits, which gives your finances a boost.
Navigating Limited Company Setup for Contractors
Navigating limited company setup for contractors might not be as tricky as you first thought.
- You set up a limited company with Companies House, either yourself or through an accountant.
- Your limited company enters into contracts with clients, not you personally.
- You invoice clients through your limited company for the services you’ve provided, on a pre-agreed basis.
- The limited company receives payments from clients, and from this you can pay yourself a salary, distribute dividends, cover business expenses and pay tax.
With a limited company structure, you have much more financial and administrative control, compared to contracting as a traditional employee, sole trader or through an umbrella company.
The Financial Benefits of Setting Up a Limited Company
With so many financial benefits of setting up a limited company, it’s easy to see why it’s a route many contractors take.
- Tax Efficiency - One of the main financial benefits of setting up a limited company for contracting is the tax efficiency it brings. You can pay yourself a low salary, which is a deductible expense for the company, and then pay yourself the rest in dividends. These are subject to lower tax rates than income tax, which reduces your tax liability and increases your take-home pay.
- More Financial Control - When you set up a limited company for contracting, you have more financial control. You decide how and when you pay yourself, and you can choose to retain profits in the business for future investments or strategic tax planning. You don’t have as much control if you work with an umbrella company or stick with being a sole trader.
- Claimable Business Expenses - As a limited company contractor, you can claim a range of allowable expenses against your income, which reduces the business’ taxable profit. There’s a long list of expenses that can be claimed, including business travel, office equipment, software, business insurance and home office costs.
- Business Credibility and Brand Reputation - Another benefit of setting up a limited company is the boosted business credibility and brand reputation. Though setting up a limited company doesn’t immediately improve these, many clients do prefer to work with limited companies, which opens up higher-value contracts and longer-term opportunities for you. By setting up a limited company, you’re showing clients you take things seriously.
Limited Company vs. Umbrella Company: Key Financial Differences
There’s a handful of contractors who prefer the simplicity and ease of working through an umbrella company, but there’s many who have opted for the limited company route. Though they are both ways of navigating contracting, and they’re unlikely to change the day-to-day professional services that you provide, they do have some key financial differences. When you compare these key financial differences, you’re likely to find that setting up a limited company tends to be a more lucrative path.
For example, limited company contractors benefit from a tax-efficient structure through salary and dividends, retaining more take-home pay and having more control over how they’re paid. They can claim a wide range of business expenses and keep profits within the business for investment or future years.
However, when working under an umbrella company, contractors are treated as employees. This means they're paid under PAYE, with income tax, National Insurance and agency fees automatically deducted. Though this simplifies the administrative side of being a contractor, it does mean umbrella company contractors have very little control over how they’re paid, when they’re paid and what expenses can be claimed. There’s no option to retain profits or plan tax strategically, and umbrella company fees also need to be paid.
When you consider these key differences, it’s easy to see that umbrella companies are easier, but they’re less financially rewarding.
Do Limited Company Contractors Have Higher Take-Home Pay?
Yes, more often than not, limited company contractors do tend to have higher take-home pay than sole traders and umbrella company contractors. Though the exact increase depends on income level, expenses and how tax-efficient things are managed, the majority of limited company contractors benefit from keeping more money in the business.
Is Limited Company Setup More Tax-Efficient for Contractors?
In most cases, limited company setup is more tax-efficient for contractors, as long as your contracts fall outside IR35. This is because dividends are taxed at lower rates than salaried income, you can claim a wider range of tax-deductible expenses, and you can make tax-efficient pension contributions.
However, this tax efficiency is reduced if your contracts are inside IR35. For contractors working inside IR35, you’re treated as an employee for tax purposes, and this means you’re required to pay taxes in the same way as a permanent employee. There’s no scope for tax-deductible expenses or paying yourself in dividends to reduce tax liabilities.
Are There Any Financial Downsides to Setting Up a Limited Company for Contracting?
As you can see, there are a lot of financial benefits of setting up a limited company for contracting, but there are also a few downsides. Though these are unlikely to put you off, you do need to consider them when you’re planning your approach to work.
- Accountancy and Admin Costs - You might be comfortable managing financial records and tax yourself, but not all contractors are. If you need help, you’ll need to factor in the cost of hiring a limited company accountant. While some contractors manage their own accountants, the risk of costly errors often outweighs the savings, which is why many hand things over to a professional, accepting it’s going to increase their outgoings.
- Time-Consuming Administration - There are legal and financial obligations that you, as the company director, are responsible for when you set up a limited company. This includes filing annual accounts and confirmation statements with Companies House, handling payroll, submitting VAT returns if you’re registered, and keeping accurate records of all income, expenses and dividends. This can take up a lot of time, which takes time away from money-making tasks. If you outsource the administration, you’ll have fees to pay.
- Limited Company Setup Costs - Though setting up a limited company is affordable, there are a few upfront costs to consider. For example, registering with Companies House costs a small fee, and some providers charge for business bank accounts. If you need business insurance, as some industries do, you’ll need to factor the ongoing cost of that into your budget.
- No Sick Pay, Annual Leave or Employee Benefits - As a contractor operating through a limited company, you are not entitled to employment benefits, which you would be if you were employed by another business as a permanent part of the team. Without annual leave, sick pay, employer pension contributions and maternity or paternity leave, you’ll need to cover the cost of time off work yourself.
At Go Limited, we know how many decisions you have to make as a contractor. But, for the majority of contractors, choosing to set up a limited company isn’t a decision you’ll regret. Whether you’re doing it for the increased take-home pay, the tax-deductible expenses or the dividend payments, you’ll likely find the financial benefits of setting up a limited company outweigh the increased administrative responsibilities.
FAQs: Financial Benefits of Limited Company Setup for Contractors
1. What are the main financial benefits of operating through a limited company?
The main financial advantages include:
- Tax efficiency: You can pay yourself through a mix of salary and dividends, which can reduce your overall tax liability.
- Flat rate VAT scheme: Many contractors benefit from keeping a percentage of VAT collected under this scheme.
- Business expenses: You can claim allowable expenses (e.g. travel, equipment, software), reducing your taxable profit.
2. How does dividend income help reduce my tax bill?
Dividends are taxed at lower rates than salary and are not subject to National Insurance Contributions (NICs). By taking a small salary and larger dividends, many contractors pay less in tax overall compared to being taxed solely through PAYE.
3. Can I keep more of my income by working through a limited company?
Yes. In most cases, contractors working through a limited company can retain more of their earnings compared to those working via umbrella companies or as employees—especially when working outside IR35.
4. Are there tax-free allowances or reliefs available to limited companies?
Yes. Some examples include:
- Annual investment allowance on equipment
- Use of home as office allowance
- Employer pension contributions made through the company
- Director’s loan account (used correctly)
- These all offer ways to reduce your Corporation Tax bill or take money from the company more efficiently.
5. Does the flat rate VAT scheme still offer savings?
It can, depending on your sector and how much VATable expenditure you have. For many service-based contractors, the scheme allows them to keep a small percentage of the VAT collected, boosting profits.
6. Is setting up a limited company worth it if I’m inside IR35?
If you’re working inside IR35, the financial benefits are significantly reduced, as most income is taxed like PAYE earnings. However, some still prefer to operate through a limited company for future flexibility or to manage multiple income streams.
7. Can I claim more business expenses through a limited company?
Yes. Limited company contractors can typically claim a wider range of expenses than employees or umbrella workers—such as equipment, business travel, accountancy fees, and training (if relevant to your trade).
8. Are there any hidden costs to running a limited company?
There are costs to consider, such as:
- Accountancy fees
- Annual filing and compliance costs
- Insurance (e.g. professional indemnity)
- Time and effort managing finances
- However, many contractors find these are outweighed by the financial benefits.
9. Can my limited company contribute to my pension tax-free?
Yes. Your company can make employer pension contributions, which are an allowable business expense and not subject to NICs. This is a very tax-efficient way to save for retirement.
10. How do I know if the limited company route is right for me?
It depends on factors like your contract terms, IR35 status, income level, and willingness to manage a company. Speaking to a specialist contractor accountant can help you understand the best option for your circumstances.
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.
