Go Limited - July - Advantages and Disadvantages of Setting Up a Limited Company for Contracting in the UK
Go Limited - July - Advantages and Disadvantages of Setting Up a Limited Company for Contracting in the UK
To truly understand the pros and cons of setting up a limited company for contracting in the UK, you need to familiarise yourself with how the process works. A limited company is a legal entity in its own right, completely separate from you. But, that does mean you are solely responsible for setting everything up, and managing the day-to-day running of things. By doing so, you become the director and shareholder. This brings a number of pros and cons to the table.
At Go Limited, we’re here to ensure you know all there is to know about limited company contracting in the UK.
How Does a Limited Company Work for Contracting in the UK?
You start by registering your company with Companies House and opening a business bank account. When you complete a project, you then invoice clients through your company for the services you’ve provided. Once your cash flow is up and running, you have the freedom to pay yourself in a way that works for you. For most limited company contractors, this is through a combination of salary and dividends, after working out the most tax-efficient approach for you.
Limited Company Contracting: Roles and Responsibilities
As a limited company contractor, you are responsible for your business’ financial records, tax returns and legal compliance. You might also need to register for VAT, depending on your income level. One thing to remember as a limited company contractor, is that you need to
determine your IR35 status for each contract, which can impact your tax treatment. This can be complicated, which is why many contractors enlist the help of professionals.
Though setting up a limited company for contracting in the UK does have many, many benefits, it also places more responsibility on you. You’re the person responsible for managing your business affairs and staying compliant with tax legislation. If you get something wrong, you’re responsible for sorting it out. For a lot of contractors, working with a limited company accountant is the obvious solution.
The Benefits of Setting Up a Limited Company for Contracting
There are a number of benefits that come with setting up a limited company for contracting, which is why it’s such a popular route for contractors in the UK.
- Tax Efficiency - One of the main benefits of setting up a limited company for contracting is the potential for higher take-home pay. As a director and shareholder, you can pay yourself a low salary - of course, staying within personal allowance limits - to reduce income tax and National Insurance (NICs) and take the rest of your income as dividends, which are taxed at a lower rate than salary. You also have the advantage of claiming tax-deductible business expenses for things like working from home and equipment costs, which further reduces how much tax you have to pay.
- Limited Liability Protection - Your limited company is a separate legal entity to you, which means that your personal assets - such as savings and property - are protected if your business runs into legal or financial trouble. Your liability is usually limited to the amount of money you’ve invested in the business, rather than the total amount.
- Professional Image - There’s something professional about having a limited company as a contractor. This gives you a competitive advantage, as some clients see limited companies as more established and credible than sole traders, making you more likely to secure contracts.
- Greater Control Over Your Income - As a limited company director, you have more control over when and how you pay yourself, how profits are distributed and how much money you can retain in the business for future use. This flexibility can support better financial planning and long-term business growth.
- Opportunities for Business Growth - Unlike other business structures, a limited company allows you to employ others if you need to, expand your services and sell the business. You also have the ability to apply for credit or funding in the business’ name. This makes it a more scalable option if you plan to grow your contracting business over time.
The Downsides of Setting Up a Limited Company for Contracting
Of course, alongside the benefits of setting up a limited company for contracting, there are also a handful of downsides. Though these shouldn’t put you off setting up your own company, it’s important that you’re aware of them.
- Increased Administrative Responsibility - As a limited company director, you’re legally responsible for submitting annual accounts to Companies House, filing a Corporation Tax return with HMRC and managing PAYE, dividends and VAT returns. You’re also responsible for keeping accurate business records and receipts, and staying compliant with IR35 rules. This can be a lot to handle, especially if you already have a lot to keep on top of. To make it easier, many contractors hire an accountant.
- IR35 Compliance Risk - IR35 is a tax legislation aimed at identifying disguised employment. If HMRC determines that your working arrangements are similar to that of an employee - even if you’re paid through a limited company - you’ll be taxed as an employee, removing most of the tax benefits. Usually, your client determines your IR35 status, and they could end up needing to deduct tax before paying you. This doesn’t give you much space to find a tax-efficient way of working.
- Ongoing Limited Company Costs - Setting up a limited company is relatively inexpensive, there are costs that go into maintaining one. You’ll need to factor costs such as accountant fees, software subscriptions and insurance into things, as well as potential penalties for late or incorrect filings. These costs quickly add up, taking away some of the financial benefits of being a limited company contractor.
Does Limited Company Contracting Work for All Industries?
Yes, limited company contracting does work for all industries, and it’s by no means limited to specific niches or sectors. However, though many industries accommodate limited company contractors, it’s more common in specific sectors. The contractors who usually set up limited companies tend to be those with a medium to high income, working on short and medium-term projects and with contracts outside IR35. Limited company contracting is popular in IT, software development, engineering, construction, finance, accountancy, consulting and creative industries.
The Alternatives to Limited Company Contracting in the UK
If you're considering setting up a limited company for the first time, you might be wondering if it’s the best contracting route for you. Though there’s a lot of benefits, and it’s likely to be the option you choose, there are a handful of alternatives to consider.
Umbrella Company
An umbrella company acts as your employer and handles all tax, NICs and payroll administration, reducing your responsibilities. You submit timesheets and they pay you after deductions, making the entire contracting process extremely convenient. Working with an umbrella company is easy to set up, easy to run and easy to stay IR35 compliant. But, it does tend to be less tax-efficient - you pay full PAYE and NICs, as you’re treated like an employee - and you have less control over income and finances. You also have admin fees to pay, to cover the cost of the umbrella company’s services.
Sole Trader
If you work under your personal name or trading name, and you don’t set up a limited company, you’re a sole trader. As a sole trader, you need to report your income via Self Assessment, and there’s no need to register with Companies House. It’s easy to set up and manage, there’s fewer admin and reporting responsibilities, and there’s no fees. However, you don’t have any limited liability or tax planning opportunities, and it doesn’t always look as professional as setting up your own company.
Questions to Ask Yourself to Find Out if a Limited Company is Right for You
Before you jump into setting up a limited company for contracting, there’s a handful of questions to ask yourself.
Is your contract inside or outside IR35? - If you’re contracting inside IR35, much of the financial advantage of setting up a limited company disappears.
How long do you plan to contract for? - Long-term contractors can benefit more from the investment in setup and admin, which can be a lot of work if you only plan to contract for a short amount of time.
Are your clients happy to work with limited companies? - Some clients or agencies only accept umbrella company contractors due to compliance policies, so be sure to check where your clients stand on the matter.
Are you happy to have extra responsibilities or hire an accountant? - If you dislike paperwork or the idea of running a company, setting up a limited company might not be the best fit, unless you’re happy to hire an accountant.
At Go Limited, we know that setting up a limited company for contracting in the UK is a big decision, but it’s likely to be one that pays off. With tax-efficient and financial benefits, and the professionalism it shows, setting up a limited company could be what’s needed to drive your business forward.
Frequently Asked Questions: Limited Companies
What are the advantages of a limited company?
Limited companies offer several benefits including limited liability protection, tax efficiency (especially through dividends), professional credibility, and the ability to raise capital more easily than sole traders or partnerships.
Are there any disadvantages to running a limited company?
Yes. Limited companies come with more paperwork and regulatory responsibilities, including filing annual accounts and corporation tax returns. Directors also have legal duties and personal liability if they breach them.
What is the difference between a private limited company and a public limited company?
A private limited company (Ltd) cannot sell shares to the public, whereas a public limited company (PLC) can list shares on the stock market. PLCs have more regulatory requirements and must have at least £50,000 in share capital.
What are the advantages of being a limited company in Scotland?
The advantages are largely the same as elsewhere in the UK: limited liability, tax planning opportunities, and increased credibility. In Scotland, you also benefit from local economic support and access to Scottish government grants.
Can a limited company save me tax?
Potentially, yes. A limited company pays corporation tax on its profits, which is often lower than income tax for higher earners. Directors can also pay themselves through a combination of salary and dividends to be more tax-efficient.
What are the main advantages of a limited company compared to a partnership?
The two key advantages are:
- Limited liability – your personal assets are protected.
- Separate legal identity – the company can enter contracts in its own name.
What is a company limited by guarantee, and what are its advantages?
This is a type of company typically used by non-profits or charities. Instead of shareholders, it has members who guarantee a small sum if the company is wound up. It offers limited liability and a formal structure for non-commercial organisations.
What are the advantages of putting property into a limited company?
Using a company can offer tax advantages on rental income and allow for easier inheritance tax planning. However, this depends on your situation and comes with additional costs like higher mortgage rates and potential capital gains tax.
Is there any benefit to having a company car through a limited company?
A company car can be convenient and tax-efficient for electric vehicles. However, petrol or diesel cars often come with high benefit-in-kind (BIK) tax charges. It's best to assess whether personal or company ownership is more cost-effective.
Can I get life insurance through my limited company?
Yes. A Relevant Life Policy allows your limited company to pay for your life insurance, which can be tax-efficient. It’s an allowable business expense and may reduce corporation tax, without being treated as a benefit-in-kind.
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.
