How do I start a limited company instead of using an umbrella company?

If you accept contracts outside IR35, you may find it more beneficial to operate via a limited company than contracting through an umbrella company. Our short guide provides a brief overview of how to start a limited company instead of using an umbrella company.

What are the benefits of starting a limited company instead of using an umbrella company?

There are many benefits of starting a limited company instead of using an umbrella company, for example:

• There is increased earning potential as you can set your hourly or day rate and negotiate potential contracts with end clients. You can also specialise in specific industries or a niche area.
• As a limited company director, you have much more control over the contracts you accept and the hours you work to create a work/life balance that suits your lifestyle.
• There is very limited liability as the company is a separate legal entity, which means the assets of the directors and shareholders are protected.
• As you operate outside IR35, you can pay yourself a salary and dividends, which is much more tax-efficient than PAYE. You can also use tax planning opportunities tailored to your business and goals.
• You can reduce your taxable profit by claiming legitimate business expenses.
• Once your company is registered, no one else can use the name. This is particularly useful for establishing yourself as a reputable and credible business and building your brand.

How do I start a limited company instead of using an umbrella company?

If you want to start a limited company instead of using an umbrella company, we’ve outlined the steps you need to follow to set one up.

1. Choose a company name – It must include ‘Limited’ or ‘Ltd’. You can check the availability of your chosen company name on the government’s website.
2. Appoint directors and shareholders – You must appoint a director and at least one shareholder. Please note that the same person can be both the director and the shareholder.
3. Prepare a Memorandum of Association and Articles of Association – These establish the rules for running your limited company and outline how it will be governed.
4. Register with Companies House – Once you have decided on a company name, you need to register with Companies House using the online registration service, which is available here.
5. Register for Corporation Tax – Most commonly, companies register for Corporation Tax (and PAYE) at the same time as registering with Companies House. To register for Corporation Tax, please complete the steps on the government’s website.
6. Register for PAYE – Even if you only employ yourself as a company director, you must still register for PAYE. Please complete the steps on the government’s website to register for PAYE.
7. Register for VAT – You are only required to register for VAT if your taxable turnover for the last 12 months exceeds £90,000 or you expect it to exceed the same threshold in the next 30 days, you’re based outside the UK, your business is based outside the UK, you supply goods or services to the UK or expect to in the next 30 days. You can register for VAT online using the government’s online service.
8. Set up a business bank account – You must set up a separate business bank account to separate your personal and business finances.
9. Obtain business insurance – You must obtain business insurance to protect your company against potential financial losses in the event of unforeseen circumstances.
10. Ensure you understand limited company tax obligations and record-keeping requirements – You must familiarise yourself with the tax obligations and record-keeping requirements. You must meet your responsibilities to avoid being fined, prosecuted or disqualified from being a company director.
11. Appoint an accountant – This step is not a requirement; however, staying on top of your tax obligations can be time-consuming and daunting, particularly if you are new to contracting. Many contractors choose to appoint a contractor accountant to look after their accounts and ensure documentation is filed on time and correctly with HMRC.

Contact our sister company, who are experts in contractor accountancy

If you operate outside IR35 and are interested in setting up a limited company or are looking for a contractor accountant, our sister company, Churchill Knight & Associates Ltd, is an industry-leading provider of contractor accountancy. Their FCSA-accredited accountancy service is designed to provide contractors and freelancers with the accountancy support they require and is perfect for contractors in any industry. Please visit their website to learn more about Churchill Knight & Associates Ltd’s accountancy service.

Benefits of an umbrella company

If you are inside IR35 or do not want to start a limited company and would prefer to use an umbrella company, there are many benefits of using an umbrella company for your payroll. For example:

• Inside IR35 – If you receive an inside IR35 status determination, an umbrella company is the perfect way to get paid. You’ll be taxed at source (PAYE), just like a permanent employee, and therefore are compliant with IR35 legislation (provided you use a compliant umbrella company). We’ve written a limited v umbrella guide you may want to check out.
• Compliance with UK tax law – Compliant umbrella companies will make the appropriate tax deductions and pay them to HMRC on your behalf.
• Continuity of employment – You can work for multiple clients, and your umbrella company remains your sole employer, which does not negatively affect your tax code. Continuity of employment is helpful when obtaining a loan or mortgage.
• Insurance – Most compliant umbrella companies will provide free insurance cover as part of the service.
• Minimal administration – Once registered, there is very little ongoing administration, unlike running a limited company.
• Employee benefits – You’ll have access to employee benefits such as Maternity or Paternity Pay and Sick Pay.
• Low cost – Umbrella company margins are considerably lower than a contractor accountant’s fees.

Are you looking for a compliant umbrella company?

You should choose Churchill Knight Umbrella as your payroll provider for several reasons. We offer a fully compliant umbrella service for contractors and freelancers in the UK, showcased by our FCSA accreditation and SafeRec certification. As part of our service, you can also benefit from Same Day Faster Payments, free insurance cover, employee benefits, Churchill Knight Rewards, a salary sacrifice service (if required), and telephone and email support from our Customer Service Department.

To get a free, tailored take-home pay calculation, please call our Sales Consultants on 01707 871622 or complete the short form on this page to schedule a call for a time that suits you.