Setting up a limited company
One of the major benefits of becoming a limited company contractor is that you can significantly reduce your tax burden. Because you are responsible for deciding your salary, it is possible to withdraw an amount that minimises the tax and National Insurance contributions you are required to make.
You can then access additional finance through director’s loans and shareholder dividend payments.
Before you set up a limited company, however, it is important to determine whether you fall inside the IR35 regulations or not. This piece of legislation was introduced by HM Revenue and Customs (HMRC) to prevent businesses listing employees as directors in an effort to limit the tax they pay on their earnings.
It can be difficult to determine whether the regulations apply to you or not and this is largely dependent on HMRC’s definition of ‘self-employed’. However, as a general rule, if you are told when, where and how to work by an employer, you will be deemed to be employed and will fall inside IR35. This means that you cannot operate as a limited company contractor.
You can find out more about IR35 compliance here, but if you control your working hours and conditions it is likely that you will fall outside of the regulations and should be looking to set up a limited company.
Some clients refuse to give contract to sole-traders, so those who set up a limited company often find that they have far more options open to them as a result of doing so.
As mentioned previously, it is also more tax-efficient to work as a limited company contractor, with minimal salaries limiting your tax burden. Another benefit is that the limited company is deemed to be a separate entity from its shareholders. Therefore, you will not be liable for company debts and will have some protection if there is a problem.
Register with Companies House
One of the first things you need to do when setting up a business is register it with Companies House – a process known as incorporation. It is only at this point that the business becomes a limited company.
This step can be completed online, by post or through a formation agent. For a fee of £15, you can register a limited company online and it will take 48 hours for the company to be officially incorporated.
Postal applications are more expensive at £40 and can take between eight and ten days. If you are in a rush to get your limited company set up, a next day service is available for £100 but the application must reach Companies House by 3pm for this to be carried out.
Once incorporated, you will be given a Certificate of Incorporation, which acts as confirmation that your limited company has been formed and will contain a CRN number – you will need this for all future dealings with Companies House, including sending accounts.
When you form a limited company, you must inform HMRC of the date you created it, the name of the company, the CRN number, the sector you will be operating in and the date your company accounts will be submitted.
You will receive a Unique Taxpayer Reference for your company, which will give you information on how to give HMRC the details they require of you; how to set up an online account for Company Tax Returns and how to pay Corporation Tax.
This information must be provided to HMRC within three months of the date your company begins any business activity.
HMRC requires all limited companies to keep detailed and accurate accounts for each financial year and the taxman can request to see them at any time in a six year period, which means it is important to store them for at least this length of time.
For the vast majority of contractors, bookkeeping, accounts and tax obligations will be areas that they have very little experience in, but fortunately, there a number of accountancy services providers that will be able to assist you in this area.
These companies will make sure you are compliant with all rules and regulations, inform you of the level of salary you should withdraw to minimise your tax obligations and help you claim any expenses you are entitled to.
Furthermore, they will be able to guide you when completing a Company Tax Return, which is one of the more complex processes relating to limited company contracting.