Limited Company Guide for Contractors

2 November 2011

Working Through a Limited Company

A PayMatters Guide

About Paymatters

PayMatters provide accountancy services to freelance contractors working through their own limited company or via our umbrella company.

We can help you:

• Set up your limited company

• Set up a business bank account

• Process your allowable expenses

• Provide an online portal available 24/7 which shows you at any point in time the amount you can withdraw from your business

• IR35 contract reviews

• Provide support with your own personal account manager

Working via a limited company can allow you to maximise your earnings due to tax breaks that are available to encourage the entrepreneurial spirit of contractors. PayMatters can provide all the advice and support to your individual circumstances to ensure you are getting the most out our running your own business.

 

Introduction

Choosing to become a freelance contractor is an important decision and one of the most crucial parts of this decision is finding a way of working which is most suitable for you.

Working through your own Limited Company is often the most financially rewarding, however does bring some further responsibilities. This guide will take you through the benefits, responsibilities and the process of setting up.

If you are not aware of the other options available our guide to contracting can provide you with further information on the differences to help you decide which will best suit your individual circumstances.

What is a Limited Company?

A Limited Company is a company where the liability of its members is limited by shares, which usually represents what they have invested in the company. The company is limited by shares which are typically given to the value of £1, this way reducing the risk of the directors and shareholders.

Freelance contractors who open their own limited company are usually the main director and shareholder of the business.

In terms of taxation, the profit of a Limited Company is subject to corporation tax deductions (currently 20%). It is also important to be aware that if your company’s turnover is going to exceed £73,000 then you must register for VAT.

There are a number of other ways a Limited Company can provide benefits for example through pension contributions and expenses. In terms of tax advice this is dependent on individual circumstances and so we would advise you to have a one-to-one meeting to discuss in further detail.

 

Benefits of Working Through a Limited Company

When working through a limited company you are likely to make lower personal tax contributions

- since you are a director and a shareholder you can choose to pay yourself a small salary to make minimal PAYE and National Insurance contributions. Company profits are then subject to corporation tax (currently 20%), the remaining funds are then available to take as dividends.

When a limited company declares dividends (these are based on a company’s net profit after tax), no further tax is payable unless you are a higher rate tax payer and then only the amount over the higher rate tax threshold is taxable. In these circumstances an additional tax of 25% of the net dividend is payable. While running your own business you have the advantage of timing the withdrawal of dividends to manage the risk of higher rate tax.

The table below provides you with some example of take home pay:

Hourly Rate

Hours Worked Total Expenses Weekly Pay Monthly Pay

£25 40 £1000.00 £100.00 £843.04 £3,653.11

£37.50 40 £1500.00 £100.00 £1,258.24 £5,452.31

£50 40 £2000.00 £100.00 £1,673.44 £7,251.51

These example figures would include a combination of salary and dividends and any dividends could be subject to Higher Rate Tax dependant on earnings.

Another benefit comes in the protection of limited liability; this provides protection for the company members through keeping the finances of the company separate from their personal finances, meaning it is the company that is liable for any debts accrued while the directors are not.

Further benefits are available by adding a second shareholder - it is possible to employ or have as a shareholder a partner or spouse that are active in your business and utilise their personal allowances and lower tax bands. You can also register for the Flat Rate VAT scheme which allows you to pay VAT at a percentage lower than the 20% VAT rate.

Having a limited status also projects a more professional appearance to potential clients and provides them with a sense of confidence in your business.

 

Responsibilities of being a Director of a Limited Company

As you would expect, taking the role of director of your own limited company involves a

number of different responsibilities.

Running the company and managing the finances of the company are tasks that you will undertake on a daily basis, however you are also responsible to submit all the necessary returns:

• Annual return to Companies House

• Annual Accounts

• Corporation Tax Return

• VAT returns (if registered)

It is this extra administration that discourages people from running their own limited company, however with PayMatters we can make this a simple process by providing you with all the necessary information to complete and submit these returns in an organised and timely manner.

 

Employment Status

It is important as a freelance contractor that you understand the possible implications associated with your employment status and in particular IR35.

IR35 was introduced to stop the use of an intermediary, usually a limited company or partnership, to “disguise” an employment relationship between the contractor and their end client. By using an intermediary, the contractor could receive income as a mixture of wages, expenses and dividends which resulted in an increase to net pay when compared to being a direct employee of the client. Therefore if you are going to benefit financially from using a limited company through receiving dividends, you must be compliant with IR35.

As part of our standard Limited Company service we will include an IR35 review of your contract and working practices.

 

The Incorporation Process – What do you need to do?

Naming

The first step of opening your own company

is choosing what to call it.

Choosing a company name can be a difficult decision and there are a number of criteria you must abide by when doing so:

• The name of your company must be unique

• It should not include any misleading references, such as ‘accredited’ if not accurate

• It should not contain symbols or signs that are not permitted

• It should not cause offence

• It must also end in Limited or LTD

You should also think about what the name of the company says about your business to potential clients. Some ideas to consider:

• Do you use your own name? e.g. Joe Bloggs Ltd

• Do you include what you do? e.g. Chris Williams Electrical Services Ltd

• Do you look for a more traditional name? e.g. Dave Jones and Sons

• Do you use your location? e.g. Preston Engineering Services

You can check the availability of company names on the companies house website:

www.companieshouse.gov.uk/info

 

Registration

In terms of incorporating the company the easiest way to do this is to use a company

formations agent. They will take care of all of the necessary paperwork required, including:

IN01 is the Companies House application to register a company

Memorandum of Association - this contains the details of the company name, address,

members and number of shares issued.

Articles of Association - this document sets out the rules for internal regulation and how the

company will be run, such as director’s responsibilities, meeting processes, share splits etc.

These will all then be sent to Companies House and a certificate of incorporation will be

issued to you.

We can provide this service and incorporate a company for you as part of our standard service.

Set up a Business Bank Account

When opening a limited company you must also open a business bank account to ensure the funds of the company are kept separate from your personal funds. This not only satisfies government requirements but also makes it much easier to manage your company finances.

Don’t automatically open an account with your current bank out of convenience as they may not provide the best offer - take the time to look around and ensure you get the best deal.

Currently many of the main high street banks offer free service for limited periods, meaning you won’t be charged for the day to day transactions; however we would advise you look at the full range of features the account offers, ensuring you have important attributes such as online banking and good interest rates.

PayMatters can assist you in setting up your business bank account and have a business partner in NatWest who can make this a hassle free process.

 

Who are PayMatters?

PayMatters provide a value for money, fast, friendly and professional service. With a highly experienced team, supported by Chartered Accountants, we offer Umbrella and Limited Company accountancy services for freelance contractors.

The benefits of choosing PayMatters include:

• Your own account manager who will deal with all of your day to day queries and become someone you can truly rely on

• We are fully HMRC compliant and our systems, documentation and contracts

have all been independently reviewed and approved

• Online, telephone and SMS services designed to suit your needs

• Ability to process currencies other than £sterling e.g. Euros etc

• Flexible payment options; Faster Payments, CHAPs and BACs

• Access to Insurance brokers who provide competitive rates to tailored packages suitable to your individual circumstances

Call us today and see how we make running your own business as straightforward as possible

Tel: 0800 121 6513