Go Limited Tax Implications of Running a Limited Company
Go Limited Tax Implications of Running a Limited Company
Like a lot of contractors, you might be considering setting up and running a limited company. We understand why, especially if you've heard about the possible tax benefits of doing so. But, before you swap to limited company contracting, you need to understand the tax implications of doing so.
At Go Limited, we're here to make sure you know all there is to know about running a limited company, and that includes the tax side of things.
Key Things to Know About Paying Tax as a Limited Company Contractor
When it comes to the tax implications of running a limited company, there's a lot to keep on top of. Though you're bound to have a basic idea of how tax works as a sole trader, things are slightly different when you're running a limited company. You're both the limited company director and a shareholder, which means that you fall into two categories when it comes to paying tax.
As a director, you're responsible for running the company, which includes filing accounts and paying the correct amount of tax, based on your earnings. As a shareholder and contractor, you benefit from the business profits, typically in the form of dividends and salary, depending on how you decide to pay yourself.
Key Points to Remember About Limited Company Tax
1. You're a Separate Entity - When you set up a limited company, you are two separate entities. Your business has its own bank account, pays its own taxes and is legally separate from you. You have a different bank account and pay your own taxes, which aren't part of what the business pays.
2. The Business Has to Pay Corporation Tax - As a limited company director, you need to keep on top of Corporation Tax. Profits are taxed at the company level, and paid to HMRC, before you withdraw them.
3. You Need to Pay Personal Tax - As a limited company contractor, you only pay personal tax on the money you actually take out of the business. This is similar to what happens when you're a sole trader, and you pay it as part of a Self-Assessment Tax Return when you file with HMRC annually.
4. There's an IR35 Risk - Regardless of the industry that you're in, you need to understand IR35 rules. If HMRC considers you to be working as a contractor but effectively an employee, your tax changes significantly, and you could lose a lot of the tax benefits that come with setting up a limited company.
What Tax Do You Need to Pay as a Limited Company Director?
As a sole trader or freelancer, you only had to think about Income Tax. But, as the director and shareholder of a limited company, there's a few different types of tax to be aware of.
Corporation Tax - This is paid on the business' profits, which are calculated by deducting allowable expenses from the business' income. For the majority of businesses, the rate of Corporation Tax is 25%, though some SMEs with profits under £50,000 pay 19%. For profits between £50,000 and £250,000, there's a tapered rate.
Income Tax on Salary - If you pay yourself a salary, you will need to pay Income Tax and National Insurance Contributions (NICs) on that salary. Many contractors purposely keep their salary low - just above the National Insurance threshold - and take the rest as dividends to remain tax-efficient.
Dividend Tax - If you pay yourself dividends alongside a salary, you will need topay Dividend Tax. Dividends are paid from profits after Corporation Tax, and rates are 8.75% for basic rate taxpayers, and 33.75% for higher rate taxpayers.
VAT - If your business has a turnover of £90,000 or more, you will need to pay VAT. You charge VAT on your services, but you can reclaim VAT on expenses. You might be eligible for the The Flat Rate Scheme, which can be beneficial for contractors with low expenses, as you keep a percentage of VAT collected.
Tax-Efficient Ways of Running a Limited Company
A lot of contractors choose to set up a limited company because it's a tax-efficient way of managing a business.
Low Salary and High Dividends - One tax-efficient way of running a limited company is to pay yourself a minimal salary and take the rest of your income as dividends, as dividends are taxed at a lower rate.
Claiming Business Expenses - You can reduce the amount that you're taxed on by claiming business expenses, such as travel equipment, office costs, accountancy fees and professional memberships. By claiming expenses, you reduce your taxable profit, and therefore reduce the amount of tax you have to pay.
Pension Contributions - Employer pension contributions reduce company profits, lowering how much Corporation Tax you have to pay. These are also free from NICs. Plus, it helps to prepare for your financial future.
Using the Flat Rate VAT Scheme - Depending on your sector and business, you might be able to use the Flat Rate VAT Scheme. This can leave you better off compared to the standard scheme.
Using Tax-Efficiency to Increase Take-Home Pay
You're likely to find that running a limited company is more tax-efficient compared to being a sole trader, especially when it comes to take-home pay. As a sole trader, you are taxed on all of your profits as income. You'll pay Income Tax, plus Class 2 NICs and Class 4 NICs, on everything you earn. This can push you into higher tax bands quickly. But, as a limited company contractor, profits are taxed first at Corporation Tax rates. You can then decide how much to take out as salary and dividends. This flexibility usually increases take-home pay.
Sole Trader vs. Limited Company Contractor: Here's How Tax Differs
As a sole trader, you and your business are legally the same. That means all profits are taxed as your personal income, and you pay tax via a Self-Assessment Tax Return each year. However, there's not a lot of room for tax planning and tax-efficiency. You're also responsible
if the business runs into debt or legal issues, and your personal assets - such as property and savings - could be at risk.
Contracting through a limited company creates a separate legal entity. The business pays Corporation Tax on its profits, and you pay Income Tax on the money you pay yourself. Unlike being a sole trader, you'll benefit from limited liability, which protects your personal finances and assets if the business gets into financial trouble.
What's the Trade-Off?
Most people will agree that contracting through a limited company is hugely beneficial, but there is a trade-off. To benefit from the tax-efficiency or running a limited company, you have more administration to deal with. Though being a sole trader is simpler, it's less tax-efficient. A limited company takes more effort to run, but it usually results in higher take-home pay.
Tips for Making Tax Management Easier as a Limited Company Contractor
If you haven't set up and managed a limited company before, you might find the prospect daunting. But, with a little bit of research, guidance and our top tips, tax management can be simple.
Work With a Limited Company Accountant - It's a good idea to work with a limited company accountant, especially if you haven't handled limited company tax before. They can help structure your income, keep you compliant and save you money.
Use Accounting Software - There are a lot of cloud systems out there for you to use, many of which integrate with your bank account. This makes it easier to track invoices and expenses.
Plan Ahead for Tax Bills - You'll have to pay tax annually, and you don't want to be surprised by an unexpected bill, especially if you don't have savings to pay. Set aside around 20 to 25% of your profits - including some for personal tax - to make sure you have enough.
Stay on Top of Deadlines - Corporation Tax, annual accounts, VAT returns and Income Tax all have separate due dates. Missing them leads to penalties, so make sure you stay on top of deadlines.
Understand IR35 Rules - If your contract is inside IR35, you may lose the tax benefits of running a limited company. Always review contracts carefully, as you could run into problems if your IR35 status changes.
Keep Finances Separate - It's important to keep your business and personal finances separate. Use a dedicated business bank account to avoid confusion and simplify bookkeeping. This will help you to keep on top of everything that flows in and out of your business, including expenses.
There are undeniable tax implications of running a limited company, but that's not a bad thing. Though there's more paperwork and responsibility for you as a business owner, director and shareholder, there are huge benefits too. At Go Limited, we've seen just how much take-home pay can be impacted by the tax-efficiency of contracting through a limited company. As long as you understand how limited company tax works and what's expected of you, you're likely to find setting up a limited company works in your favour.
FAQ: Registering a Limited Company
1. Basics of Company Registration
Q: How do I register a limited company in the UK?
You can register a limited company through Companies House, either online or by post. The online process costs £12 and is usually completed within 24 hours. You'll need a company name, registered office address, details of directors and shareholders, and the company's articles of association.
Q: How much does it cost to register a limited company?
It costs £12 to register online with Companies House, or £40 if you apply by post. If you use a formation agent or accountant, fees may be higher but often include extras like a registered office address or business bank account setup.
Q: Can I register a limited company from home?
Yes, you can use your home address as your registered office. However, it will appear on the public record. If you want more privacy, you can use a formation agent's or accountant's address instead.
Q: What's the difference between a sole trader and a limited company?
A sole trader is a self-employed individual responsible for their own taxes and liabilities. A limited company is a separate legal entity, which means your personal assets are protected, but you'll have more paperwork and reporting obligations.
2. Registered Office Address Questions
Q: What is a registered office address for a limited company?
A registered office is the official address where Companies House and HMRC send correspondence. It must be a real physical address in the UK, not a PO Box.
Q: Can I use my home as my registered office?
Yes, but your address will be visible on the Companies House public register. Many people choose to use a registered office service in London or their accountant's address for privacy.
Q: Do I need to show my registered address on invoices?
Yes, limited companies must display their registered office address on invoices, letters, and official documents.
3. Tax & HMRC Obligations
Q: Do I need to register my limited company with HMRC?
Yes, once your company is formed with Companies House, HMRC will automatically be notified. You must then register for Corporation Tax within three months of trading.
Q: Does a limited company have to be VAT registered?
No, VAT registration is only required if your company's VAT-taxable turnover exceeds £90,000 (2025 threshold). Below this, VAT registration is optional.
Q: Do I need to register for PAYE as a limited company?
If you plan to pay yourself or employees a salary, you must register as an employer with HMRC and set up PAYE. If you only pay dividends and no salary, PAYE may not be necessary.
Q: Does a sole director of a limited company need to register for Self Assessment?
Yes, even if you are the only director, you must register for Self Assessment and file an annual tax return alongside the company's Corporation Tax return.
4. Location-Specific Questions
Q: How do I register a limited company in Scotland, Ireland, or overseas?
1. Scotland: Registration is still through Companies House but listed under the Scottish register.
2. Ireland: Registration is with the Companies Registration Office (CRO).
3. Singapore & France: You must follow local laws and use the country's company registry, not UK Companies House.
Q: Can I register my company with a London office address?
Yes, many formation agents offer London WC1A or East London addresses as your registered office. This is often chosen for a professional image, especially if you don't want to use your home address.
5. Legal & Other Concerns
Q: Can someone register a limited company using my trademarked business name?
No, if your business name is trademarked, another company cannot legally use it. However, Companies House doesn't always check trademarks when approving names, so you may need to enforce your rights if a conflict arises.
Q: Do limited companies pay stamp duty on property?
Yes, if your limited company buys residential property, higher rates of Stamp Duty Land Tax usually apply. Mixed-use properties may have different rates, so it's worth checking the specific rules with HMRC.
Q: If I register my company at my home, will my council tax change?
Normally, council tax won't change just because your home is the registered office. But if your property is used mainly for business, the local council may charge business rates.
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.
