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.

In this guide, we look at the advantages and disadvantages of contracting via a limited company.

Advantages of limited companies

A tax-efficient trading structure

Contracting via a limited company is more tax-efficient than working via an umbrella company. Assuming your work is not caught by IR35 – when all of your income is taxed as employment income.

Limited company contractors typically 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.

A ‘professional’ image for your business

If you have other business interests and wish to present a ‘professional’ image of your enterprise, the limited company structure is the way to go.

It is less of an issue in the contracting world where all contractors are limited or use umbrella companies.

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 are in complete control of your company’s affairs.

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, having an incorporated trading structure is a must if you want to seek outside investors.

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 traderships, 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 a mere 10% in CGT on share sale proceeds if you have owned the shares for a year or more.

Disadvantages of limited companies

More administration and ‘hassle’

Running a company involves more administration than working via an umbrella company, although an accountant can take on much of the work.

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 has to complete and file 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 also need to notify the registrar.

Director’s duties and responsibilities

As a company director, you are ultimately responsible for ensuring that your accounts have been prepared accurately and are submitted on time – even if these tasks are carried out by your accountant.

The perils of the IR35 legislation

IR35 represents probably the single 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 are an employee. Almost all the benefits of working via a company no longer apply.

Not ideal for short-term contracts

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

Further reading

Partner Contractor Accountants

Last updated: 17th March 2024