If you’re thinking about becoming a contractor or have recently gone self-employed, it’s well worth forming a limited company, which you can provide your services to clients through. In the contracting world, these companies are also sometimes referred to as Personal Service Companies (PSC). Simply put, a PSC is a limited company that has been formed to sell the services of one individual, like a contractor. Even though by working as a limited company contractor, the notoriously complex IR35 legislation becomes a consideration, a PSC is still perhaps the most popular vehicle to work through. This goes for whether you’re an IT contractor, an Oil & Gas contractor or a financial services consultant.
But why do tens, if not hundreds of thousands of contractors work this way? Cutting to the chase, what are the advantages of a limited company? And why should you think seriously about setting one up?
Let us explain…
Greater tax efficiency
Contractors working through their own limited company have the opportunity to maximise their tax efficiency. In other words, you should be able to take home more every year after tax than you would when working as a sole trader, for example.
Working through your own limited company gives you greater flexibility over how you pay yourself too. By paying yourself a low salary and by drawing dividends from your company, you can lower your tax liability.
Limited companies are also granted a wide range of legitimate business expenses, which can also help reduce your company tax burden.
How much more tax efficiency you’ll enjoy exactly is difficult to say without your information at hand. So to get a firm idea, it’s best to discuss everything with a specialist contractor accountant.
Tax planning opportunities
As the owner of a limited company, you can split your shares with a spouse, which gives you the chance to plan your tax better. For example, you could allocate shares to your other half and carefully time the dividends you withdraw to minimise your personal tax bill.
Again, for peace of mind, most independent professionals engage the help of a contractor accountant when it comes to organising this compliantly.
Life after work
HMRC considers pension contributions a legitimate business expense, meaning that by saving for your future you can also reduce your Corporation Tax bill. Generally speaking, making these contributions directly through your company (rather than your personal money) is considered tax efficient. Most contractor accountants should be able to put you in touch with a trusted pensions advisor, who will be able to run you through the specifics.
When you do decide to retire, having a limited company can make it more straightforward to transfer ownership to another person or company, than it might be if you were a sole trader. Just like sole traders, owners of limited companies can also enjoy Entrepreneur’s Relief, which reduces the Capital Gains Tax you pay when selling or disposing of your business.
Rightly or wrongly, people who provide their services through a limited company tend to be perceived by others as more credible. In addition to giving your business a more professional image, the fact of the matter is that many clients who regularly use contractors won’t engage the services of sole traders.
Peace of mind
A limited company benefits from ‘limited liability’. You might have heard this term before, but we’ll explain it in laymen’s terms for you now. In a nutshell, it means that you and your company are separate, in contrast to operating as a sole trader. Say something goes wrong and your client decides to sue, they will be taking action against your company, not you personally. Importantly, this means your personal assets are protected.
Granted, when you work through a limited company there are more rules to abide by and tax responsibilities – there’s no getting away from that. This is why many independent workers engage an accountant from the very start, who will be well-placed to manage your tax affairs and help you make the most of the opportunities that this way of working presents.
With over 20 years’ experience in supporting contractors, QAccounting is one of the UK’s leading contractor accountants, offering a range of trusted accountancy services that include free company formation and business banking setup. To learn more about how we make going limited simple, please request a callback – one of our friendly contractor accountants will be in touch.
Autumn Statement – Headline Changes
Autumn Statement – Headline Changes
Extracted from the ACCA Guide to the Autumn Statement 2022
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