When passion turns to profit
Becoming a Limited Company contractor may seem like a big step but, when taken properly, it’s a savvy move that could see a quantum leap in your business (and your bottom line).
When you’re pursuing your passion as a contractor, operating under an Umbrella company looks like an attractive option – with its minimal paperwork and administration. Happy days.
But if you want to turn your passion into more pounds in your pocket, you may want to consider contracting through your own Limited Company. You’ll not only reduce your tax burden, but your business will become more of a magnet for prospective clients.
What are the advantages of contracting via a Limited Company?
There are scores of reasons for “going Limited” and trading through your own Limited Company, especially if you earn £30,000 a year or more and plan on contracting for at least three to six months. We walk you through five of the main incentives.
1. Tax and National Insurance Contributions (NICs)
You’ll be hard pushed to find someone – anyone – who doesn’t want to pay less tax.
As a Limited Company director, the bulk of your income is made up of dividends, which are subject to a different tax than a regular salary. Plus, National Insurance Contributions (NICs) aren’t payable on dividends. All of this means more money in your pocket at the end of the month.
Last year’s Summer Budget may have increased dividend taxation after the first £5,000 but this shouldn’t deter would-be contractors opting for the Limited Company option. After all, at the top end, you can still take home significantly more of your contract value compared to when you operate through an Umbrella company.
Why not use our take home pay calculator to see how much you can expect to take through your Limited Company versus an Umbrella?
The more allowable business expenses you claim, the less you’ll owe the taxman.
Given that business expenses are deducted from Limited Company profits (and you only incur tax on profits), if your profits are reduced, your tax bill will be too.
As a Limited Company contractor, the range of expenses you can claim tax relief on is far broader than when you work under an Umbrella company.
3. VAT Flat Rate scheme
If your Limited Company taxable turnover is £150,000 or less (excluding VAT), you’re eligible to join the Flat Rate Scheme (FRS), which means you:
- pay a fixed rate of VAT
- keep the difference between the amount you charge your clients and pay to HMRC
Money-saving benefits aside, the FRS simplifies your record keeping and VAT calculations (never a bad thing). By contrast, if you choose to go down the Umbrella route, you won’t be able to take advantage of the FRS at all.
As a director of a Limited Company, you’re protected by having limited liability.
So, even if the worst happens and your business goes down the pan, you’ll only be personally responsible for your company’s debts to the extent of any shares you paid for and unsecured loans made to the company.
This is because your Limited Company has a separate legal personality. In other words, your clients enter into contracts with your Limited Company as an entity, not you as its director.
5. Client confidence
Appearances count for a lot in business and having a Limited Company structure can instil confidence in clients and potential clients, some of whom equate ‘Ltd’ with professionalism.
Many businesses won’t even take you on for a contract if you don’t have a registered Limited Company.
When is the best time to become a Limited Company contractor?
Conventional wisdom says that, while your earnings are fairly modest, it’s best to stay on the Umbrella pathway because your tax and accounting responsibilities are fairly basic. You can comfortably do a DIY job on your Self Assessment (and save yourself accountancy fees).
In reality, working as a Limited Company contractor isn’t just about saving money. It’s about keeping the financial health of your business and personal lives separate. There’s no better time to do this than now.
How do you start working as a Limited Company contractor?
Before cracking on as a Limited Company contractor, you’ll need to register your company with Companies House.
You have three choices:
1. Do it yourself online
2. Ask an accountant to do it on your behalf
3. Use a company formation agent
The Companies House website sets out the registration requirements, registration fee, restrictions on company names and so on. Or speak to us and we’ll do it for FREE in 24 hours. You can also read our guide to contracting and our blog on how to set up a Limited Company.
If you’re currently working under an Umbrella company and considering making the move to becoming a Limited Company contractor, talk to our experts today about what you need to know and how to get started.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.