Go Limited The Benefits of Setting Up a Limited Company
Go Limited The Benefits of Setting Up a Limited Company
If you're a freelancer, contractor or sole trader, you might have considered setting up a limited company. At Go Limited, we understand why, as there's a whole host of benefits that come with being a limited company contractor. Below, we've taken a look at the advantages of setting up a limited company, and why it's the 'go to' route for many professionals in the UK.
Limited Company Deep Dive
There are a few different ways to structure a business in the UK, but a limited company is certainly one of the most popular. With a limited company, you have a separate and legally recognised identity for your business, which protects your personal assets and boosts your professional credibility. This is called limited liability, and it means that if your business runs into trouble, your personal assets - such as your savings, house or other assets - are usually protected. Limited companies are often set up by freelancers, contractors, consultants, and small startups who are ready to take their business to the next level.
What is a Limited Company?
As a contractor, you have the option to set up a limited company. The business can own assets, enter contracts, borrow money and run into legal issues independently of you, which isn't the case when you're contracting as a sole trader. Ownership of the business is divided into shares, which are owned by shareholders. You're automatically one of the shareholders as the person who sets the limited company up, but you might decide to take on others as your business grows. Most contractors start off being the sole director and sole shareholder of their limited company, but there's nothing stopping you changing that up eventually.
Once you've set up a limited company, the company needs to pay Corporation Tax on its profits, and you need to pay tax on any income you personally receive - such as dividends or salary - as a shareholder. This might sound costly, but contracting through a limited company is often a more cost-effective way of doing things.
What Does Setting Up a Limited Company Entail?
Setting up a limited company is relatively simple, a lot simpler than many people realise. Once you've chosen a unique company name - you have the freedom to be creative with your business name, as long as it's not already in use or too similar to an existing business' name - you can decide on the structure of your limited company. You'll need to appoint at least one director, who is responsible for the day-to-day running of things, and at least one shareholder to own the business. For most contractors, both of these people are you.
You'll also need to register your limited company with Companies House, which is done online.
You'll need to provide the company name, director and shareholder details, your registered office address and various documents, such as a memorandum and articles of association. You'll also need to register your company for Corporation Tax with HMRC within three months of starting trading and set up a business bank account, as your business finances need to be separate from your personal accounts.
Who Can Set Up a Limited Company?
There are very few limitations in regards to who can set up a limited company in the UK, but there are some basic criteria that need to be met. For example, you must be over 16 years old and not be undischarged bankrupt or disqualified from being a company director. You'll also need to have an address within the UK to use as a registered office.
People in all industries can set up a limited company, regardless of the work you do, your sector and the type of projects you work on. However, it's an especially popular route for freelancers and contractors working in IT, consultancy and creative fields.
The Benefits of Contracting Through a Limited Company
Tax Efficiency - One of the main benefits of setting up a limited company is the potential to save money on how much tax you need to pay. As a limited company director, you can pay yourself a low salary and make up the rest in dividends payments, which are taxed at a lower rate than salary. This can reduce your tax bill, keeping more money in your pocket.
Limited Liability Protection - When you're contracting via a limited company, your personal assets are protected if the business faces legal action or insolvency. You're only liable for the amount you invest or guarantee - which is typically the value of your shares - and not the full amount. This is important if the business falls into debt and can't keep up with repayments.
Increased Professional Credibility - Having a limited company can boost your professional credibility, as clients, suppliers and investors can see that you're taking things seriously. They'll have greater confidence in your operation, making them more likely to choose you over your competitors.
More Control Over Finances - As a limited company contractor, you have full control over how and when you take money out of your business. This allows for more strategic tax planning, keeping more money in the business. You also have the freedom to decide how profits are reinvested or distributed, and when.
Wider Range of Contracts Available
- There are some clients, such as large corporations and some government bodies, who only work with limited companies due to legal and insurance reasons. If you're operating through a limited company, these contracts are available to you.
Are There Any Downsides to Limited Company Contracting?
As you can see, there's a whole host of advantages that come with operating through a limited company. But, that doesn't mean there isn't a downside or two. For example, running a limited company involves regular filings, record keeping and correspondence with HMRC and Companies House. This is a lot more admin for you to keep on top of, which can be a pain. There's also the chance of higher accounting costs. Though they're unlikely to be excessive, you'll likely need to pay a professional accountant to ensure you remain compliant.
Managing taxes, compliance and director duties can be daunting at first, especially if you're handling everything for the first time. Luckily, there's a lot of help out there, and experts can handle a lot of limited company complexities for you. It's also important to remember that if you're a contractor and your role falls inside IR35, the tax advantages of a limited company can be reduced.
You won't receive statutory benefits such as paid holidays, sick leave or redundancy when you're working via a limited company, unless you set them up and fund them through your company. This is something to bear in mind when you're deciding how to approach contracting.
Key Things to Remember When You're Setting Up a Limited Company
If you want to set up a limited company and have the highest chance of success, you need to keep a few key things in mind.
1. You Must Stay Legally Compliant - This means filing annual confirmation statements and company accounts with Companies House, submitting a Corporation Tax return to HMRC, and keeping proper accounting records and receipts. Failure to meet deadlines can result in penalties or your company being struck off the register, so staying compliant isn't something to overlook.
2. Understand Your Tax Obligations - There are various tax obligations that come with setting up a limited company. For example, you need to pay Corporation Tax on profits, your salary is subject to PAYE, and dividends are taxed separately. You need to understand these obligations to ensure you're not making any accidental mistakes.
3. You Are Responsible as a Director - Even if you're the only person in the business, and you operate largely as a solo contractor, being a company director means that you're legally responsible for how the business is run. This includes keeping records, acting in the business' best interest and ensuring accounts are accurate.
4. Open a Dedicated Business Bank Account - Opening a business bank account isn't optional, it's a necessity if you want to ensure your finances are in order. Mixing personal and business funds can lead to confusion, errors and even legal issues, especially when it comes to claiming allowable limited company expenses.
Setting up a limited company is a worthwhile move that can bring substantial financial, professional and legal benefits, but only if you do it right. Being a limited company contractor offers flexibility, protection and the potential for greater take-home pay, and the Go Limited experts are here to ensure you're always on the right page. With the right planning and Go Limited support, operating through a limited company can drive your career forward.
Limited Company Tax FAQ
1. How to calculate tax and National Insurance for a limited company?
A limited company itself doesn't pay National Insurance — it pays Corporation Tax on profits. NI applies to salaries paid to directors or employees.
1. Salary: The company deducts Income Tax and NI under PAYE.
2. Dividends: No NI is due, but dividend tax applies above allowances.
3. Corporation Tax: Paid on profits after business expenses and salaries.
2. How to close a limited company without paying tax?
You generally can't close a company to avoid tax. Before striking off, you must pay Corporation Tax, VAT, PAYE, and any debts.
1. If the company never traded, you may be able to close it with no tax due.
2. If you try to dissolve a company with tax owing, HMRC can object and even investigate.
3. How much should a limited company director pay themselves to avoid paying too much tax?
A common strategy is:
1. Small salary (around the NI threshold) – keeps pension contributions valid but minimises tax/NI.
2. Dividends – to top up income, taxed more lightly than salary.
3. The right mix depends on your other income and allowances, so it's worth tailoring with an accountant.
4. How much is Corporation Tax for a limited company?
Since April 2023:
1. 19% on profits up to £50,000.
2. 25% on profits above £250,000.
3. Between £50k–£250k, a tapered rate applies.
5. How do tax payments and tax returns work in the UK for a limited company?
1. Corporation Tax – payable 9 months and 1 day after year end.
2. Company Tax Return (CT600) – due 12 months after year end.
3. PAYE/National Insurance – monthly or quarterly if you run payroll.
4. VAT – usually quarterly if registered.
5. Director Self-Assessment – required if you receive salary/dividends.
6. How to get money out of a limited company without paying tax?
It's difficult to take money out completely tax-free. Options:
1. Salary – subject to PAYE tax and NI.
2. Dividends – taxed above allowances.
3. Expense reimbursement – tax-free if genuine business costs.
4. Director's loan – repayable and must be managed carefully to avoid tax charges.
7. What are the tax liabilities for a limited company?
1. Corporation Tax on profits.
2. PAYE & NI on salaries.
3. VAT if registered.
4. Business rates (if applicable).
5. Employer's NI for staff.
6. Directors and shareholders also have personal tax on salary/dividends.
8. What if a limited company closes without paying tax?
HMRC can object to strike-off, chase directors personally if there's wrongdoing, and potentially liquidate the company forcibly. In serious cases, directors can be disqualified.
9. What to give your accountant for a limited company tax return?
Typically:
1. Bank statements.
2. Invoices (sales and purchases).
3. Payroll records.
4. VAT returns.
5. Expense receipts.
6. Loan or asset details.
7. Previous accounts if applicable.
10. Does a limited company pay Corporation Tax if it has loans to pay?
Yes. Corporation Tax is due on profits regardless of outstanding loans. Loan repayments themselves are not tax-deductible, but interest may be.
11. How does a limited company director pay tax on dividends above the £2,000 allowance?
Dividends above £2,000 are taxed at:
1. 8.75% (basic rate band).
2. 33.75% (higher rate band).
3. 39.35% (additional rate).
4. You declare this via Self-Assessment.
12. Can you claim lease payments on tax for a limited company?
Yes, lease payments on business vehicles, machinery, or property can usually be deducted as business expenses. Restrictions apply for cars depending on emissions.
13. How do I claim CIS tax back as a limited company?
CIS deductions are offset against your Corporation Tax or PAYE bill. You report deductions on your monthly CIS return and reclaim overpaid amounts via HMRC or when filing your accounts.
14. Does a sole limited company director need to register for Self-Assessment?
Yes, if you take dividends or salary. HMRC usually requires directors to file a personal tax return even if all income is via PAYE.
15. How long does it take to get a tax reference for a limited company?
The Corporation Tax Unique Taxpayer Reference (UTR) usually arrives by post within 3–4 weeks of company incorporation.
16. How much should I put aside for taxes in a UK limited company?
A common rule of thumb:
1. 19–25% of profits for Corporation Tax.
2. Additional savings for VAT (if registered).
3. Budget for PAYE/NI if you pay salaries.
4. Many directors set aside 25–30% of income to stay safe.
17. How to register a limited company to pay tax?
When you register a company with Companies House, HMRC is automatically notified. They'll send your Corporation Tax UTR. You then register for Corporation Tax online and set up any VAT or PAYE schemes as needed.
18. Will becoming a limited company save tax?
Often yes, especially if you can pay yourself partly in dividends. However, savings depend on profit levels and personal circumstances. Other factors like admin, IR35, and accountancy costs should also be considered.
19. How to reduce Corporation Tax in a limited company?
1. Claim all allowable expenses.
2. Use capital allowances for equipment.
3. Make pension contributions.
4. Consider R&D tax relief if eligible.
5. Charitable donations are deductible.
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.
