Whether you consider yourself a contractor, freelancer, locum or consultant, one of the first questions you might ask when setting up is, should I work through an umbrella company or form a limited company? 

If you are considering the Limited Company option, read our guide below to understand the advantages and disadvantages of going Limited, the responsibilities that come with company ownership and the administration duties it will likely require. 

Advantages of going limited

Greater opportunities for tax planning

One of the main reasons that contractors decide to form their own limited company is that it provides greater opportunities for tax planning, which could in turn affect the amount that you take home. As a limited company director there are tax benefits available to you, which compensate for the lack of employee benefits such as holiday allowance, sick pay and maternity leave.

Dividends are one of the ways that limited company directors can make tax savings. Dividends are an alternative way for limited company directors to pay themselves without attracting national insurance contributions. For more information on how you can extract dividends from your limited company you may find our Contractors Guide to Dividends helpful.

Increase the amount you take home

If you take advantage of all the tax benefits available to you as a limited company director then the amount you take home may increase. Limited company contractors will typically take home 75-80% of their contract amount as opposed to 60-65% if you were to use the services of an umbrella company. For a clear idea of how much of your contract you could take home use our take home pay calculator.

Claim tax relief on your expenses

Limited companies can claim tax relief on a wide range of business expenses. Expenses are costs that are incurred solely and exclusively for business purposes, some examples could include accommodation, travel, training and equipment. Our Guide to Expenses contains more information on what expenses you are eligible to claim as a director.

Greater security

If you were to form a limited company, the company will be completely separate to you the director and any shareholders that the business may have. This gives you greater security as your personal assets are not at risk if your limited company was to incur any financial difficulties.

Respect

Adding ‘limited’ to your company name gives your business an air of respect, professionalism and status. This may give the clients that you are dealing with more confidence in your abilities and some companies will have a policy of only accepting limited company contractors.

Maintain control over your finances

Operating through a limited company means that you deal with your clients directly, and you alone have control over your business and your finances. If you were to use the services of an umbrella company then you have to rely on the umbrella company to collect your earnings and pay them onto you.

Company name

Limited companies all have their own trading name, which is registered with Company’s House. All limited company trading names are unique and so once you have formed your limited company no one else is able to trade under your company name. There is no stipulation that once you have formed your limited company you are required to start trading straightaway, so if there is a particular limited company name that you have your eye on you may want to consider forming your limited company straight away.

 need to speak to an accountant

Disadvantages of going limited

Reduced privacy

Companies House require certain company records and accounts from all limited companies, which become public record and can be accessed by anyone. More detailed information about directors and shareholders can also be viewed, but access to these details can be limited.

Administration responsibilities

As a limited company there will be some administration duties that you are required to complete such as tax returns, expense details and business accounts. These administration duties are typically not too time consuming, but are required to be completed each month.

Increased accountancy fees

Limited companies have more complex accounts than other contracting options and so your accountancy fees may increase. However, it is worth remembering that the cost of using an umbrella company is often more expensive than accountancy fees and the tax planning opportunities available to limited companies provide even more scope to make savings.

How do I form a Limited company?

Forming a limited company may seem a daunting and costly process, but you will be pleased to know that the process is much more straightforward than you may first think. As part of our premier accountancy service we offer limited company formation free of charge.

To form your limited company all you need to do is decide on a company name and then we will do the rest. Our service includes limited company formation and registration with Companies House, registering your business for PAYE and VAT along with assistance opening your business bank account.

For more information on forming a limited company or the service that Nixon Williams provides visit our Premier Accountancy Service page or contact a member of our new business team on 01253 362062 or email jacqui.fairbrother@nixonwilliams.com.