Limited Company

What is a Limited Company?

A Limited company is a corporate structure formed to conduct your business activities. There must be at least one director and shareholder. Directors are responsible for running the company, and shareholders own the company. The company is its own legal entity and is separate from its owners (the shareholders).

In a contracting business, you are usually the director, 100% shareholder and employee.

The company’s finances and the shareholder’s finances are separate. The company’s assets and profits, after corporation tax, belong to the company, not to the shareholders.

The company profits can, however, be withdrawn by the directors and employees of the company as salary, or as dividends to the shareholders.

What are the advantages of a Limited Company?

A limited company is a popular option for contractors and freelancers because of the flexibility, security and other advantages it provides, some of which are listed below:

Limited liability

An important advantage of trading as a limited company is that it offers limited liability. This means that, as a shareholder, you can partake in the company’s profits, but if the company makes losses, becomes insolvent or is sued for negligence, you can only lose up to the value of your shares in the company. This provides you with peace of mind, especially if your contract stipulates that your company is financially liable should something go wrong.

As a director, you are also not personally liable for the company’s debts, unless it can be proven that you have acted fraudulently or improperly under company law. If creditors lose money through the director’s fraudulent activity, the directors’ personal liability is without limit. HMRC will also likely pursue directors if there is outstanding tax debt – in particular PAYE from any salary paid to the directors.

Tax efficiency

Companies pay corporation tax on their taxable profits. Any income you take from the company as salary is subject to the PAYE rules. This includes both employer and employee national insurance contributions. If you own the company, you are also effectively the employer and must pay the employers national insurance contributions to HMRC.

Dividends, on the other hand, do not attract national insurance by either the employer or employee; therefore is a very tax efficient way of drawing income from the company.

If your total personal annual income exceeds certain thresholds, dividends are also subject to personal dividends tax. But because dividends are not subject to National Insurance contributions, drawing dividends from the company still represents a more tax efficient means than salary.

If you operate compliantly and legally and satisfy the IR35 rules, the Limited company option offers the most tax efficient way of working. There is also a much wider range of legitimate allowances and expenses that can be offset against a company’s taxable profits.

Financial flexibility

Trading as a limited company allows you to take more control over your finances. You decide when and how much to withdraw from your company profits. Because you control how much you earn, you also, therefore, control how much personal tax you will pay in the current tax year. This financial control and flexibility is an attractive advantage of operating a limited company as it allows for better tax planning opportunities.

Continuity

Once formed, the company is ongoing (unless you decide to shut it down). If a director or employee moves on the company can still exist. A limited company can be easier to change ownership or sell.

Investment

If you want to raise capital and find an investor who is willing to invest in your company, it is relatively easy to raise funds by issuing or selling company shares.

What must I consider before deciding to work through my own Limited Company?

Whilst trading through a Limited Company can offer flexibility, security and the best returns of income, there are a number of key points to be aware of before choosing this option. Below are a list of important facts you should consider before deciding to operate through your own limited company:

Intentions

Setting up, running or closing a limited company has legal and tax requirements. Many of the requirements and legal obligations continue, even when not actively working on a contract. In order to help you meet these obligations, you may require the assistance of a professional accountant and incur charges. We recommend you should only consider running through a limited company if you intend to contract for the foreseeable future.

Financial awareness

When you operate through a limited company the income generated belongs to the company and must be paid into the company bank account. You must make provisions for future tax liabilities before considering how much of the company’s income you can withdraw as salary and dividends. If you take too much from the company and are unable to pay its future tax bills, the company will incur penalties. You should not be tempted to take funds from the money set aside for future tax demands. Money you take as a loan from the company is repayable and could have personal tax implications for you. For this reason, you will need to have a good degree of financial discipline and awareness.

Aside from the company taxes, you may also need to make provisions for tax you might incur in a personal capacity if your annual personal income from your company and/or other sources exceeds certain levels.

First Freelance helps our clients track their company finances at all times in real time, so they know exactly how much to set aside for taxes and how much they can legally withdraw.

First Freelance also help our clients forecast and make provisions for any potential personal tax for income from their company or other any sources you tell us about as part of our personal tax planning service. First Freelance don’t only offer the best accounting service, our company and personal tax planning services make managing your finances seamless and stress free.

Your IR35 status

The returns from a limited company will vary depending on your IR35 status for each contract you undertake. If your contract is inside IR35, you should be paying employed levels of tax. If your contract is outside IR35, you are free to choose to pay yourself a tax efficient combination of salary and dividends. IR35 can be a complicated piece of legislation to understand. We have prepared a comprehensive IR35 guide for your benefit. If you are operating through your own limited company, we recommend you always take professional guidance on your IR35 status for every contract. If HMRC chose to challenge your status and were successful and you were unable to demonstrate you took reasonable care, then penalties could be applied. We, therefore, recommend a professional review should include a conclusions report.

First Freelance offer comprehensive IR35 tax guidance to you. We also work with the leading experts in this field providing you access to full contract and working practice review services at affordable prices for your peace of mind.

Level of personal organisation

Running your own limited company requires personal organisation. As a company director, you are responsible for the reporting obligations to HMRC and Companies House. This includes keeping the company’s financial records updated and ensuring the PAYE, VAT, Corporation Tax, Annual Financial Statements and Annual Shuttle Return reporting is done within the required periods to avoid penalties.

With First Freelance, you have a dedicated accounts team who will help with all of this and assist you every step of the way.

Business insurances

Operating through a limited company may require you to hold business insurances, such as Professional Indemnity and Public Liability. This may be an obligation in your contract.

First Freelance partner with Insurance providers who specialise in freelance and contractor business insurances in order to bring you the most comprehensive and affordable insurances on the market.

Choosing an Accountant

Choosing your Accountant is an extremely important decision. In 2007, HMRC introduced the Managed Service Company (MSC) Legislation. This legislation sets out the parameters of service, support, involvement and advice that can be supplied to contractors operating through their own limited companies. If your accountant or provider fails to meet these requirements, it prescribes that all income you receive from your limited company must be taken with full PAYE deducted, regardless of your IR35 status! Non-compliance of your Accountant will lead to additional tax liabilities and the recovery of these is always made from you the contractor in the first instance. This legislation is complex, and contractors could unwittingly find themselves subject to additional tax demands as a result of actions taken by their accountant or provider. Some of the indicators you should look out for can be requested from a member of Compliance team.

First Freelance takes this legislation extremely seriously, and each and every element of our service has been meticulously scrutinised and audited to ensure we are 100% compliant.

Is the Limited company option right for me?

The limited company option is ideally suited to you if you:

  • have decided to commit to freelancing or contracting for the long term (usually at least 6 months but ideally longer)
  • earn a rate of pay that makes working through a Limited Company preferable
  • want the maximum return on your income
  • contract outside of IR35
  • accept the director’s responsibilities and an awareness of the legislation associated with running a limited company
  • like to be in control of your finances
  • have the financial discipline not to spend money set aside for taxes
  • are comfortable with a level of administration
  • have an excellent accountant to support you wherever necessary

Choosing a specialist contractor, freelancer and small business accountant like First Freelance provides you with all the comprehensive support you need to run your Limited Company. This includes support to ease the burden of paperwork, keep track of your finances and taxes 24/7, comply with the legislation, help you meet your responsibilities and make your contracting and business life seamless with our meticulously thought out service.

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I'm an accountant myself but I must say I couldn't have done without the support of First Freelance. – Mugu S.

What I love is that they took the time to meet me in person. I certainly feel I can trust them. – Nadia D.

First Freelance have provided me with excellent support every step of the way. They genuinely care. – Bhargavi P.

The team are knowledgeable and their customer service is outstanding! – Chieme M.

I've worked with many accountants over the years. None have come close to First Freelance. – Daniel J.

They genuinely care about my business and personal finances. – Jennifer W.

First Freelance have provided me with an outstanding level of expertise. I highly recommend them! – Linda P.

I love having 24/7 visibility of my business finances. The 'live' business bank feed is an excellent feature. – Guido M.

What I love is that they took the time to meet me in person and explain everything clearly. – Olufunmilayo A.

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