Contracting via a limited company – advantages and disadvantages

For many contractors, working via a limited company is the optimal way to work – especially if you are not caught by IR35.

It is seen as the most tax-efficient way to work, offers a professional image, and has numerous other benefits.

For others, the umbrella company offers the best solution, as it represents a “hassle-free” way to contract.

This guide examines the advantages and disadvantages of contracting through a limited company.

Since the off-payroll (IR35) reforms, many medium and large clients no longer engage contractors via limited companies. In these cases, contractors are often required to work through umbrella companies, which removes much of the tax advantage.

Advantages of limited companies

A tax-efficient trading structure

Contracting via a limited company is usually more tax-efficient than working via an umbrella company, provided your work is not caught by IR35.

Many limited company contractors take a small salary, beneath the prevailing NI and income tax thresholds.

Most income is drawn down as dividends, which are not subject to NICs.

The tax gap has narrowed significantly in recent years, but a tax advantage still exists for most, particularly if your spouse is a co-shareholder.

A ‘professional’ image for your business

The limited company structure is the best option if you have other business interests and need to project a professional image.

This is less of an issue in the contracting world if you’re contracting via recruitment agencies, although it may help if you want to contract directly with end-clients.

Limited liability should things go wrong

As a director, your liability if the company goes bust is limited, as the name suggests. Unless you have been negligent, or have behaved criminally, of course.

One exception to this rule is if you are asked to personally guarantee a bank loan to the company. This is an increasingly common practice when your company borrows money.

Control over your business affairs

As a director, you have complete control over your company’s affairs.

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An accountant can take on almost all of this burden, although the directors are ultimately responsible for all company actions.

The benefits of having shares and shareholders

You can create different share classes, which can be useful for tax-planning purposes. You might decide to co-own the company with other family members, such as a spouse.

If you decide to diversify or expand your business in the future, an incorporated trading structure is essential if you plan to raise outside capital.

Tax-planning opportunities

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.

Succession planning opportunities

As a limited company is a legal entity in its own right, it can be sold or passed on to future generations with ease. This is not the case with sole proprietorships, for example.

BADR (formerly Entrepreneurs’ Relief) benefits

If you sell your company and have accumulated funds within it, you may be able to benefit from the Entrepreneurs’ Relief (BADR) scheme.

If eligible, you pay 14% in CGT on share sale proceeds if you have owned the shares for a year or more. It is worth noting that the BADR CGT rate will rise to 18% from April 2026.

The lifetime limit for BADR is £1 million of qualifying gains.

Disadvantages of limited companies

More administration and ‘hassle’

Running a company requires more administrative work than working through an umbrella company, though an accountant can handle much of it.

Ongoing costs of owning a company

There are some moderate costs associated with running a company. These include company filing fees, accountancy fees, stationery, and one-off legal and administration expenses.

Annual Accounts, Confirmation Statement and other filings

Each year, your company must complete and file its Annual Accounts with HMRC and Companies House.

Every company must complete a Confirmation Statement to Companies House at least once per year.

If you make changes to your company’s share structure, address, or officers’ details, you must also notify the registrar.

Director’s duties and responsibilities

As a company director, you are ultimately responsible for ensuring that your accounts are prepared accurately and submitted on time, even if your accountant performs these tasks.

The perils of the IR35 legislation

IR35 is probably the biggest impediment to a peaceful life as a contractor. It applies to individuals who work via their own companies but are deemed to be ‘disguised employees’.

If your work is caught by the IR35 rules, all of your income will be taxed as if you were an employee. Almost all the benefits of working via a company no longer apply.

If you work via an umbrella company, then IR35 doesn’t apply.

For a detailed comparison, see our guide to umbrella vs limited company contracting.

Not ideal for short-term contracts

As the setup process involves a certain amount of time, effort, and expense, the limited company route may not suit someone planning to take on a short-term contract.

Further reading

• Find out about the pros and cons of working through an umbrella company.
• If you want to set up as a limited company, try our directory of specialist contractor accountants who can help you get started.
• Visit Limited Company Help for further in-depth company guides.