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.
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.
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.
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.
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.
