If you’re a contractor in the UK looking to work for yourself for the long-term, it’s definitely worth working through your own limited company. From larger paychecks to limited liability, we discuss all of the reasons why this is the most effective way to structure your finances as a contractor.
Tax benefits galore!
This is one of the main advantages of running your business as a limited company. While sole traders pay Income Tax, limited companies pay Corporation Tax on their profits. Corporation Tax rates are lower than Income Tax rates, meaning you’ll often pay less tax when you incorporate.
Corporation Tax is set at 19% for the current 2017/2018 tax year, which is a 1% cut from the 2016/2017 tax year. What’s more, the UK government has stated that they aim to cut Corporation Tax down to 17% by 2020. The basic Income Tax rate is 20%, while the higher rate is 40%. For higher earning contractors, particular those who earn £200 a day, working through a limited company is virtually a no-brainer.
What’s more, if you are the director of your limited company, you can choose to take a salary and draw out most of your income in the form of dividends. If you set your salary at the optimal level, you can reduce your tax liability even more. An experienced contractor accountant can assist you in maximising your dividend payments up to the higher rate tax threshold, ensuring you take home more money.
Your liability is limited
Peace of mind is important, especially when it comes to your finances. The great thing about a limited company is that you have limited liability for the finances and debts of the business.
This means that you will not be held personally liable for the company’s financial losses should things go wrong, which means you have added protection. This added protection can enable you to take calculated business risks without the prospect of being personally liable.
Those who are self-employed don’t enjoy the same benefits and can potentially have unlimited personal liability for the debts of their business.
A professional company image
In many ways, having a limited company projects a far more professional image than working as a sole trader. Larger companies often prefer to do business with limited companies that have their own company name, logo etc.
Another benefit of incorporating is that, once you are registered with Companies House, your company name is protected by law. No one can use the same name as you, or anything that is too similar. This means that no one can steal your company name, which could be potentially damaging to your business.
In the long term, a limited company structure can aid future plans you may (or may not yet) have for your business. Once your business is registered, you have the option of selling it in the future, which can be difficult with other business structures.
A limited company also allows you to contribute a portion of your income to a pension. Pension contributions will usually be a tax-deductible expense for the company, which means they should gain Corporation Tax relief. It’s best to consult a qualified contractor accountant to ensure you are contributing the optimal amount of your income every month.
Enlist help and reap the rewards
The biggest obstacle for contractors is usually the time and effort it takes to set up and register a limited company with Companies House in the correct way. We can set up your limited company for you in 24 hours, as well as take care of the Certificate of Incorporation, Memorandum and Articles of Association.
If you have any questions about forming your limited company, or the accounting and tax requirements that come with it, get in touch with us via email, or check out our contractor accounting packages.
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