Is Limited Company A Game Changer?
Demystifying Tax Implications: Why Forming a Limited Company Could Be a Game-Changer?
When the time comes to take your business to the next level, you as a freelance and contractor have a variety of paths to take. You might decide to amp up your workload, taking on more clients and putting in more hours. You might opt for a rebrand, focusing your attention on branching out to offer more services and trying to break into new markets. But, for a lot of sole traders and contractors, forming a limited company could actually be the perfect next step on your professional journey.
At Go Limited, we’ve seen many sole traders and contractors achieve a lot of success, but then they’re left wondering what’s next. Instead of ‘umming’ and ‘ahhing’ about what to do, the answer could be simple - form a limited company. For contractors with relatively large turnover, forming a limited company could be a game-changer in terms of tax-efficiency, boosted income and conveying just how professional, trustworthy and legitimate you are as a brand.
Why Setting Up a Limited Company is a Game-Changer for Contractors
There are a lot of ways to approach working for yourself. You might choose to be a freelancer - either as your full-time job or as a side hustle, alongside employment - or a full-time sole trader, or you might focus your attention on contracting for various companies. There are benefits to all of this but, if you're turning over a significant annual profit and you’re ready for more, you might find that setting up a limited company provides a number of benefits that give your business (and your finances!) a boost.
Higher Limited Company Take-Home Pay
More often than not, operating as a limited company results in higher take-home pay, compared to working as a sole trader or freelancer. This is because contracting through a limited company enables you to pay yourself a combination of salary and dividends, and dividends are taxed more efficiently than income tax on sole trader profits. You also have the benefit of corporate tax rates, which tend to be lower than the higher end of personal income tax rates. Contractors with a limited company can also claim tax-deductible expenses, further reducing your taxable income and increasing your take-home pay.
Separate Legal and Financial Entities
A limited company is a separate legal entity from its owner. This means that your personal assets are protected if the business struggles to repay debts or liabilities, which isn’t the case if you’re a sole trader. When you set up a limited company, you keep all of your financial matters apart. This simplifies record-keeping and makes it a lot easier to submit your tax return and manage expenses, as it’s clear what the business has paid for. For contractors handling multiple clients, this reduces personal financial risk.
Professional Credibility and Trust
Limited companies are often viewed as more professional and reliable compared to sole traders, which can make it easier to garner the attention of clients, especially large clients who have the budget to work with any company they want. As a contractor, setting up a limited company attracts clients who prefer to work with professionals to operate through a limited company. Plus, having a business name mentioning ‘limited’ or ‘Ltd’ works well for marketing, showing that you are serious, established and professional.
As you can see, there are many advantages to setting up a limited company for contracting, and it’s easy to see why it’s something a lot of sole traders do. Whether you want to operate in a more tax-efficient way or you’re keen to build your professional credibility, setting up a limited company is often a game-changer.
Is Limited Company Take-Home Pay Higher?
There are a lot of reasons to consider setting up a limited company, but it’s the higher take-home pay that draws in a lot of sole traders and freelancers, convincing them to make the change. Compared to contractors who are sole traders or freelancers, those operating through a limited company tend to have a higher take-home pay. This is because you can pay yourself a combination of salary and dividends as a limited company contractor, which lowers how much tax you’ll need to pay.
In the UK, income tax rates are structured as follows:
- 20% on earnings over £12,570
- 40% on earnings over £50,270
- 45% on earnings over £125,140
By contrast, dividend tax rates are lower:
- 8.75% for basic rate taxpayers
- 33.75% for higher rate taxpayers
Because dividends are taxed at a lower rate than salary, paying yourself partly through dividends can significantly reduce your overall tax bill. This strategy allows you to keep more of your income by minimising high-rate income tax exposure.
Can You Reduce Limited Company Tax?
Yes, you can reduce limited company tax, which is yet another reason why forming a limited company could be a game-changer for you. There are a whole host of tax deductible expenses to take advantage of when you’re contracting through a limited company, including business-related travel, office costs, software, professional services and branded uniforms. You can also reduce limited company tax by paying into a pension scheme. As a director of the company, contributions to your pension are a tax deductible way to save for retirement, whilst also reducing your corporate tax liability. By taking all of these expenses away from your profit, you’re taxed on less and the amount due at the end of the financial year decreases.
Is it Easy to Set Up a Limited Company for Contracting?
A lot of people miss out on the benefits of forming a limited company, simply because they assume that doing so is complicated. But, setting up a limited company in the UK is relatively straightforward. A lot of it can be done online for a small fee, using HMRC and Companies House.
Limited Company Tax Planning Tips
To make sure that you’re getting the most out of forming a limited company, you need to prioritise limited company tax planning. Here are some things you can do to maximise your income and ensure your tax affairs are always in order.
Hire an Accountant
There’s nothing stopping you from forming a limited company and handling the tax side of things yourself. But, unless you have a good grasp of what’s required for limited company tax, you might find it overwhelming. After all, there’s a lot to think about and it’s more complex than sole trader tax. This is why a lot of limited company contractors hire an accountant. A good accountant can help you navigate tax rules, ensure compliance and optimise your tax position. You can focus on other aspects of running a business, knowing that an expert is taking care of your finances.
Keep Detailed Records
Maintaining accurate records is a vital part of tax management for limited companies. Every transaction, both incoming and going, needs to be documented with receipts, invoices and bank statements. Not only do these records simplify the process of filing your tax returns, but it also makes it easier to show your expenses and tax reductions claims, in case of a HMRC investigation.
Plan Dividend Payments Carefully
Careful planning of dividend payments can reduce your tax liabilities. Dividends are taxed at a lower rate than salaries, making them a tax-efficient way to take profits from your company. But, timing is an important part of the equation. Paying dividends in a tax year when your income falls within a lower tax bracket can minimise the amount you owe, but make sure that you’re still earning enough to pay National Insurance contributions. You don’t want to focus on keeping your income as low as possible, only to later realise you haven’t contributed enough to receive the full state benefit.
Maximise Allowable Expenses
Understanding and claiming allowable business expenses can greatly reduce your taxable profits, but you need to claim for the right things. It’s important to find a balance between claiming every expense that’s exclusively for business use and properly documented with receipts, without falling into the trap of claiming for things that aren’t allowable expenses.
Monitor Tax Deadlines
Missing tax deadlines can lead to costly penalties and damage your business’ financial reputation. Make sure to stay aware of deadlines for filing deadlines for Corporation Tax, VAT returns and self-assessment tax returns. Late submissions or payments can lead to fines, and these can escalate quickly if they remain unpaid.
FAQ
What are the main tax benefits of forming a limited company?
The primary advantage of a limited company is tax efficiency. This structure allows you to:
- Take a low salary to reduce Income Tax and National Insurance Contributions (NICs)
- Collect additional income via dividends, which are taxed at lower rates than salary
- Claim a broader range of business expenses
- If you're working outside IR35 and earning over £35,000 per year, this approach can significantly increase your take-home pay.
How is dividend taxation applied in 2025?
As of April 2024, the dividend allowance is £500. This means only the first £500 of dividend income is tax-free. Beyond that, dividend income is taxed at the following rates:
- 8.75% (basic rate)
- 33.75% (higher rate)
- 39.35% (additional rate)
Even with the reduced allowance, dividends remain more tax-efficient than full PAYE salaries when combined with a strategic low-salary approach.
What are the Corporation Tax rules in 2025?
Corporation Tax is applied to company profits and depends on how much your company earns:
- 19% for profits under £50,000
- 25% for profits over £250,000
- Marginal relief applies to profits between £50,000 and £250,000
Strategic expense claims and planning can reduce taxable profits and lower your overall Corporation Tax liability.
What’s the difference between a sole trader and a limited company from a tax perspective?
As a sole trader, you pay:
- Income Tax on all profits
- Class 2 and Class 4 NICs
Sole traders cannot split income or take dividends, which can lead to higher tax bills when earnings exceed £30,000–£35,000. A limited company offers greater tax-saving opportunities but also involves more administration.
Does forming a limited company protect me from personal financial risk?
Yes. A limited company offers limited liability protection, meaning you are not personally responsible for the company’s debts or tax obligations—unless you break the law or provide personal guarantees.This structure is especially useful when scaling your business or taking on higher-risk contracts.
How does IR35 affect limited company tax advantages?
If your contract falls inside IR35, HMRC treats you as an employee for tax purposes:
- Your tax and NIC obligations mirror those of a full-time employee
- You lose access to most dividend-based tax benefits
While the company structure still exists, contractors under IR35 often use umbrella companies to manage their finances.
Can I reduce Corporation Tax by claiming expenses?
Yes. Limited companies can claim a wide range of business-related expenses, such as:
- Equipment and tools
- Business travel and accommodation
- Accountancy fees
- Software and mobile phone costs
- Marketing and subscriptions
These claims reduce taxable profits, thereby lowering your Corporation Tax bill. However, all expenses must be wholly and exclusively for business use, per HMRC rules.
Are limited companies still tax-efficient despite recent changes?
- Yes, under the right conditions:
- You earn over £35,000 annually
- You work outside IR35
- You want more control over income and tax planning
Although new rules like reduced dividend allowances and tiered Corporation Tax rates have impacted the savings potential, limited companies still offer more flexibility and long-term financial control than other structures.
What extra costs should I expect when running a limited company?
Running a limited company involves some additional expenses, including:
- Accountant fees (£80–£150/month)
- Companies House filing fees (£34/year)
- Payroll software or PAYE setup if paying a salary
- Business insurance (e.g., public liability or professional indemnity)
For higher earners, the tax savings often outweigh these costs.
How do I know if setting up a limited company is right for me?
Ask yourself:
- Am I earning enough to benefit from tax savings?
- Am I working outside IR35?
- Am I ready to handle extra admin, or outsource it?
- Do I want to scale or have more control over my finances?
If you answered "yes" to most of these, forming a limited company could be a smart financial move. Speak to a contractor accountant or tax adviser to model your situation.
Please note: Any rates and thresholds mentioned in this article are correct at the time of publishing and may be subject to change.
At Go Limited, we know that everyone’s business is slightly different, but that doesn’t mean that becoming a limited company is only for a handful of people. In fact, there are a lot of sole traders out there that could benefit from setting up a limited company and taking their business to the next level. Though setting up a limited company can seem daunting, we’re here to guide you through every stage, taking you from being a simple sole trader to a thriving limited company.
Please note: Any rates and thresholds mentioned in this article are correct at the time of publishing and may be subject to change.
