Is a limited company right for you?

The two most common ways to get paid as a contractor are starting a limited company, and using an umbrella company. There are perks to running your own business – but is it right for you?

If you’ve been freelancing as a sole trader (meaning you are self-employed but without a formal business structure like a limited company), then you’ll likely know the ropes well enough to be able to run a company with ease. However if you’re just starting out contracting or thinking of switching from umbrella to limited, it can be a trickier decision to make.

There are a few things to think about when considering starting your own limited company for contract work:

1. You’ll be working for yourself

Running a limited company as a contractor can be a great way to operate for many reasons, including having more tax planning options, freedom over finances and enhanced credibility with clients.

With all the perks of a limited company there are some sacrifices to be made, especially if you are moving from permanent employment to contracting:

Pension – You’ll still have a pension pot from any previous pension schemes you’ve been a part of throughout employment. As a limited company director and shareholder, you are responsible for setting up your pension scheme. You can do so personally or through your company – read our guide to find out more about pension schemes for contractors.

Having a pension as a limited company contractor can be more beneficial as you can make tax and NI-free contributions to your pension pot up to the maximum allowance of £40,000 per year (2019/20).

Holidays – You do not get traditional holiday pay as a contractor. Umbrella companies offer a standard 28 days of statutory annual leave, which involves calculating a percentage of your income and either repaying this out to you at each payday or accruing until you are ready to take holiday. If a limited company is a viable option for you, having the additional tax planning options overrides the annual leave benefit of an umbrella company.

As a company director, you are responsible for funding any time off you take. If done with careful planning and saving, you can enjoy greater freedoms than a permanent employee. It’s important to build a relationship with your client and check your contract details to determine how best to approach taking time off.

Overtime – As a contractor, you are only paid for the time you are contracted to do, except in specific situations and agreements. Be mindful of any IR35 risk!

Sick pay – Again, as a contractor you are not paid for sick time or time spent not working for the end-client.

These may seem like a lot of sacrifices to make, but most contractors who have made the change believe that the pros, such as higher rates of pay and greater independence, outweigh the cons.

Try our take home pay calculator to see how you can maximise your income through a limited company:

2. IR35/Off-payroll legislation

There is a piece of legislation called IR35 which helps to determine the tax status of contractors and freelancers operating through an intermediary – which in most cases means a limited company.

The tax status of a contractor depends on a combination of working circumstances and contractual terms concerning a particular role. If a contractor is ‘outside IR35’ they can operate a limited company as normal and see the benefits of doing so. A contractor who is caught by IR35 or deemed ‘inside IR35’ is said to be working more similarly to a permanent employee and should be taxed as such.

If your contract puts you inside IR35, operating a limited company is not the most beneficial option because your income would need to be taxed at source like a permanent employee. It’s important to review your contract carefully with your agency or end-client and obtain an independent review from a tax status specialist.

An umbrella company is generally the better option for roles that are inside IR35. If you’re thinking of starting a limited company now, you should be aware of changes to IR35 coming into effect in the private sector from 6th April 2019. This could affect your decision – but contact us in the first instance to work out what your best option is.

Alternatively, you can choose to work through an umbrella company for inside IR35 roles and keep your company active or dormant on the side for any outside IR35 roles that arise.

3. Responsibility

Running a limited company can be made very easy with the right contractor accountant or software-service package. There are fully compliant services available that can take nearly all the hassle away by providing unlimited support in the setup process and ongoing administration of your limited company.

It’s important to remember that at the end of the day your company is your responsibility. As a director, you are responsible for submitting accurate accounts and paying the correct amount of tax, so you need to take an active role.

Knowing what is best for you, your current situation and future plans will help you decide whether a limited company is right for you. You can get a free consultation on your payroll options as a contractor from our tax experts – call 01707 871622, or request a callback.

Still deciding on limited or umbrella? Read our guide and get in touch with us for more information.