IT Contractor Tax Limited Company Accounts Accounting

The majority of contractors work via their own limited companies, or via umbrella companies.

Most contractors contract via limited companies as this is the most tax efficient way to operate, especially if you are not caught by IR35.

Other contractors who don't want to deal with any paperwork, are contracting for a short period, or are caught by IR35, may prefer to contract via an umbrella company - as this represents a "hassle free" way to contract.

So, what are the advantages and disadvantages to incorporating a company?

Advantages of limited companies

• Contracting via a limited company is more tax efficient than working via an umbrella company. Limited company contractors typically take a small salary (minimising PAYE and NIC liabilities), and withdraw the remainder of their income in the form of dividends.


• If caught by IR35, the benefits of incorporation are much reduced, but you may still benefit from joining the flat rate VAT scheme, and using the 5% expenses allowance.


• Having a company will be advantageous if you have other business interests and wish to present a 'professional' image of your enterprise.


• Your personal liability as a director is limited, as the name suggests, if things go wrong.


• As a director, you are in complete control of all company affairs, both financial and administrative.


• You can create different share classes, which can be useful for tax-planning purposes, to attract investors (if you diversify your business), or to divide ownership between a number of people.


• Limited company owners can control the way they remunerate themselves. You can choose the optimum split between salary and dividends, and decide when to draw income from the company.

• Running a company involves more administration than working via an umbrella company (although typically your accountant will take most of this burden away from you).


• As a company director, you are ultimately responsible for ensuring your accounts and are correct and are submitted on time - even if these tasks are carried out by an accountant.


• The limited company route may not suit someone who is planning to take on a short-term contract.

• Read the second article in the series, looking at the advantages and disadvantages of contracting via an umbrella company.


• If you want to set up as a limited company contractor, try one of our specialist contractor accountants who can help you get started.

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