Why choose a Limited Company?
Some contractors will find that setting up a Limited Company is the best choice for them. It can offer the flexibility you need for your individual circumstances and is usually the most tax efficient way of contract working if contracting is your long-term career goal. Operating a Limited Company can then provide a compliant means for maximizing your income and control over your work environment.
What is a Limited Company?
When you set up a Limited Company, you become the director and shareholder. You have the statutory responsibility as the director, the administrative burden of operating the company, IR35 legislation (whether you can withdraw money via a dividend), and the financial risk of anti-avoidance legislation (managed service company), which can be daunting. There are however specialised financial services companies that will offer to administer all or part of the associated paperwork and on-going admin, such as NI contributions, VAT returns and personal and business tax returns, for a monthly fee.
A Limited Company is a separate legal entity and it’s legally responsible for its own actions. The finances of private limited companies are entirely separate from those of its owner(s).
What are the benefits of working as a Limited Company?
By simply setting yourself up as a Limited Company, you’ll be immediately structuring your earnings to be more tax efficient, by paying yourself a mixture of salary and dividends. You will probably be financially better off with this option, but you should always discuss your situation fully with a qualified financial advisor first – they will look at your individual circumstances and help you to make an informed decision about the best option for you.
Disadvantages of working as a Limited Company:
There can be more admin involved in running a Limited Company than there is working as an employee of an umbrella company. You can pass all the admin on to a specialist accountancy firm, but should be aware that there will be fees associated with this. Many firms offer a variety of packages to suit your individual requirements and it is worth investigating a few as the costs may be less than you would suppose. If you do decide to work as a Limited Company, you will still be responsible for arranging and paying for any insurances you require to work on client sites and depending on your circumstances, you may need to initially organise headed paper, business cards and a business bank account.
IR35, what does it mean for you?
If your contract has the same level of risk, responsibility, liability and control as a permanent employee, then you would be classed as inside or caught by IR35 legislation. This means you will have to pay full tax and full National Insurance (instead of the usual salary and dividends from the profits of your company) and reduced expenses i.e. you’ll earn less money This is because HM Revenue and Customs believes that as you aren’t taking the financial risks or have the same level of control as a director of your own Limited Company, you aren’t entitled to the same corporate tax structure.
How do I avoid IR35 and keep within the law?
In order to avoid IR35 you need to be able to prove that you are genuinely self-employed and working in business on your own account. This sounds straight forward, but the distinction between employed and self-employed for contractors under IR35 is not simple.
To avoid IR35 successfully you will need a specialist contractor accountant to provide guidance and we have listed a few at the foot of this article. The things you’ll need to think about for IR35 compliance include: control, substitution and mutuality of obligation tests, as well as how your contract is structured and the working practices under your contract. A specialist accountancy firm will be able to give advice and support to guide you through this and help ensure that you comply.
If setting up a Limited Company sounds too complicated, or you just aren’t sure if you are going to be contracting long-term, then an umbrella company may be the way to go.
Not all financial service providers are the same and you should investigate a few before making a decision. Many provide both umbrella and Limited Company services and should be able to give advice as to which is the best option for you.
Christy Media Solutions have placed many contractors within the broadcast industry, working with both Limited and umbrella companies. It is a personal choice and we will work with you and support you, whichever route you choose.
We do not advocate any particular company, but the websites listed below were used as the sources of information for this article. This list is not exhaustive and we would recommend you also do your own research and consult with a qualified financial advisor to ensure that you find the best solution to your personal circumstances.
You can also find further useful information from the PCG (Freelancer’s Association).